Symptoms of a Market Bubble and Bitcoin

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“Rocket ship increase in price”, one could use that to describe Bitcoins current pricing trend. As I write this article, I have a hard time not using the term “value” as a synonym to “price”. I don’t believe the current price reflects its ultimate value as a crypto currency.

Uses and Viability as a Currency

Crypto currencies are a wonderful thing, or at least the idea for the creation of a crypto currency is a wonderful idea. A currency where there is no centralized control by a government or institution. This creates a free exchange of goods and services without the ability to monitor or control the spending of ones fruits of their labor. I like the idea, I’m a little concerned this could ultimately lead to doing away with hard currency like the dollar and spawn a more controlling form of currency. But that’s a topic for another article.

For the purpose of this article, its important to understand that Bitcoin and other crypto currencies do provide value to a market. The currency could be used a medium of exchange for goods and services. However, current buzz about these new forms of exchange are switching the focus from its use as a currency into something else.

Bitcoin

Signs of Speculation

Peter Schiff of Euro Pacific Capital, in an interview with The Street said

“What I’ve seen is more people looking at Bitcoin not as a fiat currency, not as an alternative as a medium of exchange”, he goes on to say “Now the story is that its an alternative to gold”.

This brings up a really good point, and ultimately a question of why? Why is Bitcoin trading at such a high price at the time of writing this article? Is Bitcoin similar to gold as a store of value? One could argue that Bitcoin has a limited supply similar to gold, and therefore could be a store of value. However, if you look at crypto currencies as a whole, there is really an infinite supply that could be offered to the market.

Then the question would be, does Bitcoin offer better characteristics and qualities when compared to other crypto currencies? When compared to qualities of gold, nothing is like it on the planet and gold cannot be created in an economical way that would bring new supply to the market. Can the same be said about Bitcoin? I would argue, that crypto currencies are just in their infancy and that many new and possibly even better currencies are yet to come. Its possible that Bitcoin will continue to be the currency of choice, but to say that supply of crypto currencies are limited is a false statement. Therefore the limited supply of Bitcoin may not have a great impact on price forever. There is a real possibility that a better version of a crypto currency is yet to come and could take demand from Bitcoin.

Shoeshine Boy Test

When shoeshine boys and taxi cab drivers start giving stock market tips, its usually a sign that the market has reached a euphoric state and it is best to stay out. Bernard Baruch, a trader in the market describes the atmosphere before the crash of 1929,

“Taxi drivers told you what to buy. The shoeshine boy could give you a summary of the day’s financial news as he worked with rag and polish. An old beggar who regularly patrolled the street in front of my office now gave me tips and, I suppose, spent the money I and others gave him in the market. My cook had a brokerage account and followed the ticker closely. Her paper profits were quickly blown away in the gale of 1929.”

When thinking about Bitcoin today, does this sound familiar? I don’t know about you, but I hear people in the strangest settings talking about trading Bitcoin. I hear discussions about it on the radio, financial advisers are fielding bitcoin questions on a regular basis from their clients, my step father was considering buying some, I over heard discussions in the hallway at the office.

If water cooler talk about an investment is a social indicator of large scale speculation, there could be risk in buying at the moment. I couldn’t offer an opinion or educated guess as to what the actual price of Bitcoin should be in terms of its value as a currency, but the current price is likely well above its ultimate value.

 

Resources:

The Street interview with Peter Schiff – Bitcoin discussion

Fortune Magazine article – When The Shoeshine Boys Talk Stocks…