Hey everyone, it’s Finance Fridays again. Today I’m going to talk about Bitcoin (again). You may have seen it setting new records in the news lately, so today I wanted to ponder “Is Bitcoin a Bubble?”

Stock Photo from: Pixabay

Sensei’s note:

I’m writing this article on 11/30/2017 to be posted tomorrow December 1, 2017. Given how volatile things are with Bitcoin, we may see a huge boom or bust between me writing this post and me actually posting it. So, if this post makes no sense by the time I post it, please understand.

So then…

Is Bitcoin a Bubble?

First things first. I’m not an economist or anywhere near an expert. This is simply my opinion and my speculation. Honestly, I don’t think being an expert even matters in something like Bitcoin considering how volatile it is.

So… is it a bubble?

However, I’d say almost certainly yes. The real question is, “where are we in its bubble?”

However, first, let’s look at Bubble Economics. Here is a popular depiction of its “main stages”:

This is from Jean-Paul Rodrigue over at Hofstra University.

So let’s discuss now: “Where are we in the bubble?”

The “Stealth Phase” of Bitcoin was probably when its advent sometime in 2009 to about 2012-2013.

At this point in 2012-2013 we started “hearing” about Bitcoin, the Awareness phase. It then started to show up in the news, usually with regards to illegal activities, such as Silk Road.

We hung out in the Awareness phase until about 2016 or so when Bitcoin became essentially universally known, this is the beginning of the Mania phase.

From Coindesk

As you can see, from the end of 2016 Bitcoin was hanging around $600 or so, before shooting up to nearly $2500 in the first half of 2017.

In my opinion the “mania phase” is basically the same as “Fear of Missing Out (FOMO)”, which I’ve written about before.

Of course it hasn’t stopped yet:

From Coindesk

It’s currently sitting at around $9900 after it peaked at almost $11000 for a very short amount of time before “crashing” to around $8500, and then moving back up to ~$10000 again.

So then, the question is now:

“Where are we in the Mania phase?”

So may argue that we’ve already reached the “New Paradigm” phase with the spike to $11000, with return to normal of ~$10000. This would suggest that we’re just about to drop off into the abyss with a crash to Bitcoin “back down to Earth”.

While possible, I don’t think so. I think we’re still somewhere in between enthusiasm and greed.

What does this all mean?

Not much, to be honest.

Although that nice graph by Jean-Paul Rodrigue looks really nice and simple, the truth is that those smooth lines are just trends over time. Bitcoin is so volatile that we can see massive 20% swings within a day’s time. In this Mania phase, I thing we’re going to see many different boom-bust cycles before we get to “New Paradigm” peak.

In fact, Bitcoin crashes at least once a quarter:

from Mauldin Economics, using data from Coindesk

Bitcoin isn’t for the faint of heart and honestly, it’s volatility makes any other “volatile” asset seem pretty stable in comparison.

It’s very much like this:

From International Herald Tribune, October 27, 1989, Kal, Cartoonists and Writers Syndicate, 1989

However, it’s even faster than that nowadays. With all this information and the ease of buying/seling at our fingertips, the panic is multiplied.

Everyone has a fear of missing out. “This is the next big thing, I need to get in on it.” 

Well, what do YOU think?

Just a reminder, I am not your financial advisor. This is just my opinion and speculation.

But here it goes:

Remember what I said in my prior posts?

“So… here’s the crazy idea:

I plan to retire at 60 or so, which is around 2040. At this time my kids will be finishing college, around 22 years old.

Let’s say my wife and I die at 90 or so in 2070, and I leave Bitcoin to my kids (who are ~50 years old). Let’s say I give them 10 Bitcoin each or something.

So Kylie has 10 Bitcoin and Lucas has 10 Bitcoin.

Kylie has two kids (A and B) and Lucas has two kids (C and D).

They each give their children 5 Bitcoin when they die at 90 in 2110.

The last Bitcoin is mined 30 years later in 2140, with their Bitcoin divided amongst my great-grand kids.

So then….

If you really want a long bet. Buy Bitcoin and it’ll help your great grand kids have passive income.”

I wrote that in September when Bitcoin was sitting at $3600… that was only 2 months ago!

I even speculated that I felt Bitcoin was overpriced at $5000 and a $4000 valuation seemed “right” by my own approximation using my Goldilocks Method™.

“It’s really just “$3k is too low”, “$5k is too high”, and “$4k is just right”. I’ll call it the “Goldilocks Method™” of calculating Bitcoin value. Like I said, for right now, I think “the floor” is $3k. It doesn’t make sense to me for Bitcoin to drop below that amount.”

Has anything really changed between then and now?

Really, it’s just that Bitcoin has become more mainstream and is becoming considered as a valid form of currency and a new technology. It previously operated in this gray area of “is this real or is this a scam?” territory. I consider it kind of like being a digital gold equivalent, but yet it doesn’t have any correlation with anything. Meaning it has no correlation between the “normal” aspects of a portfolio, stocks, bonds, or gold.

That said, I think Bitcoin is incredibly overvalued at $10000 currently.

However, it doesn’t really matter what I think. If people are willing to pay that much, then there are people who will be willing to sell at that price.

Overall, I think that Bitcoin will do some minor corrections over the next few months and we will see its price fluctuate between $7000 and $10000 for the next few months, based on the current information. However, who knows what can happen.

For example, if Amazon or Ali Baba (or both) decide to suddenly take Bitcoin, we may see Bitcoin jump to $20000 or $25000 or something ridiculous. At that point, we may begin trading in Satoshis rather than Bitcoin. For those who don’t know, a Satoshi is 0.00000001 (one hundred millionth) Bitcoin.

TL;DR

Bitcoin is crazy and not for the faint of heart.

I think it’s a bubble, and I’m sure many agree with me. The more important question is, where are we in the bubble?

Personally, I think we’re still in the Mania phase, somewhere between Enthusiasm and Greed.

How much is Bitcoin actually worth? Nobody knows.

However, I think it’s probably going to yo-yo between $7000-$1000 for the next few months… Unless something crazy happens.

I consider Bitcoin to be the digital equivalent to gold. However, it has no correlation to anything because of its volatility. This may be enticing to some, who want to diversify their portfolios.

Isn’t speculation fun?

-Sensei

Agree? Disagree? Questions, Comments and Suggestions are welcome.

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