By Max Bibeau | USA
In recent months, the formerly underground cryptocurrency Bitcoin has been thrust into the spotlight by thirsty investors and average citizens looking to get in on its massive spikes in value. The currency has gone up in value from only $1,006 on January 1, 2017, to now peaking at almost $5,000 in mid-September 2017 . The currency has changed from being a decentralized movement to a mainstream cash grab. However, while Bitcoin is extremely unpredictable, I wish to offer some analysis on why I believe that the Bitcoin bubble will eventually pop.
First, the massive deflation that Bitcoin is experiencing is following the exact model of many previous bubbles. This doesn’t necessarily mean that Bitcoin will follow the exact same pattern, but it should make us wary of the currency, and lead us to look at it closer. One good example is the well-known NASDAQ Telecommunications Bubble, where investors madly bought stock in the NASDAQ Telecom Index around 1999 and 2000. In February 2000, the Index peaked at about $1140, and crashed down to $150 within the span of 2 years, settling at about 13% of its former value. David Ader, a chief macro strategist at Informa Financial Intelligence, noticed this similarity and matched the graph of Bitcoin to the graph of the NASDAQ Telecommunications Index.
As can be seen in the graph, the trading values of Bitcoin and the Index seem to be following an eerily similar pattern. Another example can be seen in the Japanese Nikkei Index, which peaked at $38,957.44 in 1989, only to gradually crash down to 7,054 in 2009. The crash is widely recognized as being caused by massive over-investment into Japan’s economy, caused by generous speculations on the future of the country. Again, the causes of such a crash are extremely similar to Bitcoin, in that the future of Bitcoin is constantly hyped up by forum echo chambers, and by large-scale investors wishing to fuel the wild buying taking place in order to raise the value of their holdings. While the future of Bitcoin is amazing to speculate, over-hyping the currency will do nothing but delay the success that it could achieve.
Next, Bitcoin’s price is far too dependent on no large-scale sales being performed. Only about 16 million Bitcoins are currently in circulation, meaning that the currency can be easily influenced by large sales. For example, the assumed top holder of Bitcoin, and its founder, Satoshi Nakamoto, is estimated to hold 1148800 Bitcoins. Such a massive store of Bitcoin being sold all at once would completely devastate the price of Bitcoin. Satoshi’s fortune alone, worth about $4,595,200,000 is about 6.9% of all Bitcoin in circulation. 6.9% of such an already volatile currency being sold at once would drive the price down radically. Another significant holder, though not quite as wealthy, is the FBI. When the FBI seized the Silk Road and arrested the founder, Ross Ulbricht, they also seized the 615,000 Bitcoins that the website generated in profit as well. Low estimates put the FBI as still holding almost 150,000 Bitcoin. While not as significant as 6.9%, the FBI’s holdings make up somewhere between 0.9% and 3.7% of all Bitcoin in circulation. Other mining companies are assumed to hold hundreds of thousands of Bitcoin in reserves. The influence these individuals have on the market is extremely dangerous, given that one sell order of such size could devastate the entire market.
Bitcoin is an incredible idea. And I do believe that has an incredible future. However, due to the over-hyping of the market, I am led to believe that a crash is almost inevitable. It is possible Bitcoin may recover after the crash, but current investment should be handled carefully.
Max Bibeau is a Senior Editor for 71 Republic. You can contact him through email at email@example.com, or follow him on Instagram with the handle @_maxbibeau.