Government issued bitcoin bring its end?

With bitcoin breaking through the $19,000 – the question of 2017 seems to be “Is bitcoin a bubble?”. Every new record high and new level it broke through even more analysts joined the bubble party – which is not as fun as it sounds. Let’s break it down though and see what constitutes a bubble and which of these tendencies we have seen with bitcoin’s super-bull run (if you allow me to be a bit superfluous).

There seems to be a slight level of delusion when talking about a bubbles – i.e. “Come on! What could possibly go wrong?”. Like the dot com bubble, the excitement for this new technology fueled the rally, which I think is common thread we are seeing with bitcoin. Market darlings like Amazon and eBay, proved that there was definitely a reason for the excitement and as we know today – both those companies redefined the retail industry and actually created a paradigm shift that traditional corporations were forced to follow. In fact, some retailers resistance to adapt to this new model might have brought their downfall.

Is there a parallel we can draw from this? Of course, the item that seems recession-proof, is innovation. That’s ultimately why Amazon and eBay survived – not because they were part of a new technological wave, but because they used the available technology and built an innovative and viable business with it. This is probably why bitcoin is so confusing to certain analysts that have been shrugging their shoulders every time bitcoin jumps. In concept the idea of a decentralized, non-government issued currency, based purely on calculations, seems practically utopian. The technology behind it – blockchain – has been cited by Mark Cuban as the future of transaction tracking technology. 

After that uplifting message though let’s wind it back and speak about the fact that the development of profit-driven speculation, artificially inflates the market/industry that inarguably has solid technology and innovation behind it, we saw it with venture capitalists during the dot com bubble, we saw it with the same venture capitalists dumping money into real estate causing another bubble (or at least that’s what some analysts assumed) and we’ve seen it now, without the bust of course – with bitcoin.

Bitcoin undeniably has intrinsic value, people are trading it for goods and services and governments are considering issuing coins that equate to bitcoin value in the local currency. This could be a renewed threat for bitcoin’s longevity, since as we’ve seen with the bitcoin gold fork – in which a segment of the community backed a fork in the cryptocurrency because they believed that mining had been concentrated in the hands of a few mining companies thus making it prohibitively expensive for individuals to mine the cryptocurrency - there still exists an ideological base (and divide) that believes and supports bitcoin’s de-centralized status. Another proposed fork could push the crypto into a tailspin, as it did when it split in the past falling respectively – 71% in 2013, 49% in 2014, 36% in the summer of ’17 and 37% later that year (although this was caused under the threat that China would prohibit or regulate cryptocurrencies).

Back to the speculative market though – bitcoin seems to be checking checkbox after check box when it comes to the patterns bubbles follow, which according to Forbes which sites Minsky’s Theory of Financial Instability:

• Displacement – We have seen bitcoin rally when gold was the norm, we have seen aggressive trading move from other instruments to bitcoin. This is the direct quote from Forbes: A displacement occurs when investors get enamored by a new paradigm, such as an innovative new technology…”
• Boom – an apprehensive rise initially, gains inertia. This is the point where the instrument or phenomenon enters the mainstream causing attracting even more investors.
• Euphoria – this is the point where the instrument defies all expectations, apprehensions and warnings. The price skyrockets – stories of millionaires that became rich riding meteoric rise of the price come thick and fast.
• Smart Money Leaves – Heading the historical parallels and signs, most “smart” money will be exiting the market at this point. This is where “trader psychology” will start affecting people, especially those astute enough to realize an impeding bubble but know at the same time that market sentiment can keep it afloat and even growing for longer than its rational. Usually a bubble needs some sort of catalyst to implode.
• Panic – The financial apocalypse the markets and the global economy in general experienced in 2008 upon the implosion of subprime/housing bubble, seems to embody this. Almost overnight the investment firms that couldn’t satiate their appetite for high risk mortgages, rebranding them as MBSs (or mortgage-backed securities) – exited the boat like it was the Titanic after its chance encounter with an iceberg.

At this point in bitcoin’s history I will apprehensively say that we may see the implosion of bitcoin if governments go ahead with issuing currency which equates to the cryptocurrency, if the rumors hold true, and the reactionary fork that the community might propose and enact to create to avoid this. No matter which direction it goes bitcoin has far outreached both its intrinsic and rational value, indicating according to Minsky’s theory that it’s prick is quickly approaching. 

Sources:

• https://www.forbes.com/2010/06/17/guide-financial-bubbles-personal-finance-bubble.html#5a57878b7af3
• https://www.forbes.com/sites/johnwasik/2017/12/11/four-ways-a-bitcoin-bubble-plays-out/#63e7700e639c
• https://www.forbes.com/sites/johnwasik/2017/11/06/why-buffett-sees-bitcoin-bubble/#21178b5a62a8