At Equities.com we’ve been following bitcoin beginning in early October, when the digital currency was just beginning to break into the mainstream consciousness. While detailing how an average investor could buy a bitcoin, we decided to explore the market, and purchased one bitcoin via Coinbase for $126 USD. We sat on it for a few weeks, then sold it for about $200. A nice little gain, right?
Wrong. Since then, bitcoin has gained an additional 500 percent in value, and on Nov. 26 broke $1,000, touching as high as $1,042 in early action. In short, we got out waaay early on what has turned into the hottest investment in years.
Investor's regret aside, with the digital currency breaking the $1,000 barrier, it begs the question: is the digital cryptocurrency's high valuation sustainable? Will bitcoin continue rising, will it settle out around its current valuation, or are we due for a massive, wealth-erasing correction any minute?
“Unsuppressed” Currency of the Future vs. Depression Waiting to Happen
There is certainly a prominent bears case for the currency. Economists like Paul Krugman tend to be especially skeptical, and deride bitcoin’s deflationary bias and unfeasibility as a legitimate currency alternative.
However, as bitcoin has broken the $1,000 milestone “gold bugs” and other alternative wealth storage analysts have jumped on the virtual bandwagon. In a piece for Marketwatch entitled “Bitcoin, not gold, has the Midas touch” Matthew Lynn argues that bitcoin has a better chance of continuing to rise while gold falls, because gold is not “suppressed.” That would also explain the massive influx of capital that is driving up bitcoin’s price.
Investors that distrust government-backed currency have long sought out alternatives for wealth storage, be it gold, silver, real estate, even fine wines. It stands to reason that more of those types of investors are pulling their money out of things like gold – which is falling in price – and sinking value into bitcoin, which is of course appreciating at a monstrous pace.
Bitcoin “Gaining Legitimacy” but “Years Away” From Necessary Liquidity
As with any investment frenzy, the elephant in the room is the word “bubble.” Equities.com quantitative analyst Nicholas Bhandari says paying attention to the price movement to see if this $1,000 mark constitutes a more stabilized price point is key. Compared to the April 2013 boom and bust, bitcoin is “gaining legitimacy,” and has a bonafide future as an alternative currency, especially as an instrument “that could possible better facilitate inter-country trade.” To Bhandari, the comments from the Fed further cement bitcoin’s viability.
However, Bhandari does see some worrying trends in bitcoin market in the near future in two areas. One, the rise of bitcoin is being substantially fueled by a flood of capital coming in from China. Known worldwide for being proponents of non paper-currency speculation, as their own currency is so tightly controlled by the government and inter-country assets are notoriously unstable, Chinese investors tend to look for alternative ways to store capital. As Bhandari puts it, the Chinese stock market is “extremely volatile and occasionally untrustworthy,” which spooks traditionally-minded speculators.
Chinese investors have for some time been sinking wealth into domestic real estate, but have realized that market uptick is unsustainable. Over the last month the Chinese have begun pulling out of land and putting into other investments, notably bitcoin.
When they find a new opportunity, “Chinese investors tend to flood a market,“ Bhandari says, with bitcoin being no exception.And they stay in... until any signs appear the asset will drop in price. If bitcoin did ever start a precipitous drop, there would be little to stop the faddish investors from pulling capital out and exacerbating the plunge, creating a full-on panic.
That fear dovetails into Bhandari’s second concern: the lack of protection – governmental or otherwise – against massive booms and busts in the currency. Like an emerging market, bitcoin is too young and illiquid to maintain market stability, and according to Bhandari “Bitcoin is years away from being liquid enough to fight off speculative binges.” Until bitcoin gains the ability to flow more freely, there is nothing to stop unbridled speculation – and the booms and busts that come with them.
The next few weeks should answer some questions. But topping $1,000 is a milestone almost no one, save the most ardent proponents, ever surmised would happen. And whether bull or bear, investors the world over now can no longer afford to be ignorant of the digital currency.
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