The last couple of days have been tumultuous for bitcoin and this is reflected in the headlines in the media. In an article on the website of The Guardian, we read:
Bitcoin has all the hallmarks of a classic speculative bubble and even after almost halving in value in a matter of weeks it still has further to fall, according to a leading team of economists.
As regulators in South Korea again signaled on Thursday that they were considering a ban on cryptocurrency exchanges, Capital Economics also dismissed claims that bitcoin and its imitators could replace established currencies as “rubbish”.
Bitcoin, which rose to more than $19,000 in December, recovered by 18% on Thursday after suffering heavy losses in the preceding two days.
Its value was sitting at $11,560 on the Luxembourg-based Bitstamp exchange shortly after 2 am GMT.
It is as easy to describe bitcoin as “done” now as it was to proclaim it the “new paradigm” a couple weeks ago. Both of these extremes seem to only scratch the surface. However, we have to go deeper to get to what the current situation might actually be. First of all, bitcoin is probably not in the position to replace traditional currencies.
Why? Well, it might be decreed illegal by the government and this would almost certainly happen in one way or another if the currency were to become big enough to threaten fiat currencies. And we’re not even close to such a situation. bitcoin is more like a big company than a currency when it comes to its size.
Second, bitcoin is not in a position to replace gold. Gold has no intrinsic value but, at the same time, it has a very long history of being the asset of choice in times of unrest. As long as people are willing to rotate into gold when the going gets tough, there is a reason to treat it as insurance. The history of bitcoin is not even comparable to that of gold.
Also, the popularity of bitcoin is akin to the popularity of Facebook – it relies on networks effects and these effects might reverse relatively quickly. For instance, it is conceivable that an improved version of the Bitcoin protocol might gain traction in the future. If you recall, in the world of technology the first instance of a solution is rarely the one to last. Just as Myspace (anyone?) lost its prevalent position in social media, Facebook might lose it.
And bitcoin is not immune to such threats, at least much less than gold. So, what might bitcoin offer? It is a separate asset class for starters. It is not correlated to anything traditional. Second, bitcoin is not a mature market and this makes it possible that it is still relatively inefficient and traditional trading techniques might work here better than in other more mature markets.
So, having in mind that it’s an extremely volatile asset and it should only be a very small part of one's portfolio (not more than, say 5%, but don’t treat this as investment advice, since it depends on one’s individual conditions), it might also offer outsized gains relative to risk. But you won’t read this in traditional media outlets.
For now, let’s focus on the charts.