10 or so days ago when the price of a single Bitcoin reached a staggering $4,600, I search its price trajectory.
The math was astonishing.
A €5,000 investment in Bitcoin in 2010 would be worth over €300 Million today.
Recently, while preparing to deliver a seminar at one of the largest global tech firms, some of the attendees were discussing the so-called cryptocurrency, which is the collective description of what concepts like Bitcoin belong to. Some were wondering if they should invest. Smart, cash-rich and well-informed, they didn’t like the odds and didn’t ‘get’ the concept but they were keen to get as much information as they could.
I have always doubted the investment proposition of cryptocurrencies like Bitcoin.
This is because they threaten a critical function of Government, which is to govern.
Modern currency is also known as Fiat currency. In other words, it is not backed by anything other than a promise by Government to pay the value of the currency. In this past, currency was backed by Gold.
Currency serves 3 specific functions, which are:
They are a unit of account
They are a store of value and
They are a medium of exchange.
That says a lot. For example, as a medium of exchange, Governments will always want to maintain a high degree of control over the value of money from a trade (domestic and international) perspective. Devalued currency for example can provide Government with options to boost trade, or reduce the real value of debt.
So, when it came to Bitcoin, I have always felt that while it continued to exist as an exotic form of currency used primarily by shady traders on the ‘dark web’, as long as it did not interfere with the daily activities of Government, then it could survive.
Then, within a few days, Chinese authorities acted.
Their primary goal was to shut down Bitcoin exchanges. This resulted in traders being scared off.
Today, Jamie Dimon, JPMorgan’s boss launched a blistering attack on Bitcoin, calling it a ‘fraud’.
It has resulted in traders becoming even more sacred.
What was a ‘sure bet’ 10 days ago is starting to look like a one-way bet to some big losses today.
Looking at Bitcoin’s price trajectory today, while it is falling sharply, the falloff in many ways mirrors it’s rise just 2 weeks ago so this could all prove to be a corrective blip in the long run.
But it is the long term where Bitcoin is likely to find the going difficult.
It has taken on the characteristics of a speculative bubble. It has become a modern-day Dutch Bulb phenomenon with cash rich investors pushing the price sky-high on little more than a gamblers impulse.
With the latest Chinese intervention, Bitcoin’s time may have been called. How interesting the Chinese intervention really is. Over 2,000 years ago, it was China that gave the world the concept of modern-day currency and here it is again slaying Mr. Dimon’s fraud!