Is Bitcoin a Mania Bound to Bust?

By Mitchell Anthony

May 27, 2021


Bitcoin has no measurable value or investment thesis but yet has garnered the attention of conservative investors as well as wild speculators. It seems like the Bitcoin Mania is far from over as speculators ripe with optimism about the need for a digital currency continue to build.  The current Market Value of all Bitcoin is nearly 1 Trillion and growing.  Bitcoin has been extremely volatile since its inception in 2012 but the value has trended higher overall despite virtually no clear understanding by anyone of how bitcoin will become a viable currency.

What is Bitcoin?

Undoubtedly Bitcoin currently is a risk asset sought after by investors.  It does not have any real value as a currency even though that is what investors speculate will ultimately happen and give it Value.  It is actually very hard to build a compelling thesis for owning it as an Asset or Currency.  Value is simply tied to Supply and Demand.

Reason NOT TO OWN Bitcoin as an Asset

  • Endorsement by regulatory environment is needed for credibility and very few governments or central banks have adopted a policy for recognizing bitcoin.
  • There is limited demand for an unregulated digital currency.
  • Bitcoin labeled as a digital currency but yet no real use as such for regular people.
  • No formula ever established by anyone for the valuation of Bitcoin.
  • Value of Bitcoin is not tied to any asset.
  • No Central bank to support Bitcoin.

Reasons TO OWN Bitcoin as an Asset:

  • No central bank diluting the value (like how the Fed prints money and weakens the dollar).
  • Proponents believe that the Globe needs an independent digital Currency not tied to any country or a central bank.
  • Value is set only by supply and demand as are all currencies.
    • Supply is limited and difficult to grow as coins are discovered through complex algorithm that grows more complex each day. This supports value! There can only be 21 million bitcoin ever created. We currently have nearly 19 million.
  • Valuable as a Black market currency.

Obstacles to use as a Currency

It is very difficult for consumers to see Bitcoin as a Stable Asset they should acquire for transactional use.   The complexity of acquiring and holding bitcoin, and doing a transaction in bitcoin is far above what a consumer is willing to do.  The volatility of the price of Bitcoin has kept consumers away.  Further there is significant transaction costs that are prohibitively high for small transactions (less than $1000).  Bitcoin transaction costs are tied to many variables including :  Network congestion, desired transaction speed, and the complexity of holdings of Bitcoin for the purchasing individual further punishing the holder of small pieces of coins.

Position of the Proponents of Bitcoin as a Currency

Proponents like the relative ease of global transactions – speed of payments to anyone anywhere by way of an internet connection and a digital wallet.  Bitcoin holding can be held with complete anonymity and hence black market transactions   where Anonymity is a necessity make Bitcoin and ideal form of payment.

Is there a Path for Bitcoin to become a functional currency?

We would need to see a lot surface on the horizon for bitcoin to become a useful viable currency.  It needs a commitment by someone to its longevity.  It needs recognition by governments or central banks as legitimate currency.  We know that successful stable currencies have always been borrowed into existence and backed by a central bank.  The historical mining of a currency such as gold failed.  Bitcoin could be headed down that same path!

Lower transaction costs are certainly needed for survival.  This would involve reinventing the formula?  A period of relative stability for the value of a coin would be required likely involving intervention by someone to support Bitcoin.

Bitcoin is just a Risk Asset flush with Mania Characteristics

Is seems like Bitcoin is just another risk asset pumped up by the easy monetary policy that has worked its way into risk assets.  Investors are flush with wealth and cash and a speculative fervor has gotten into the financial markets and now speculative assets such as digital currencies and commodities.  This is obviously concerning but we have yet to see how this fervor is creating the overcapacity that typically leads to a bust in any sector of the economy.  Prices in Tech, Healthcare, consumer goods, and industrial goods are all under control.  Housing is the outlier and we hence watch it carefully for signs of over-capacity and a possible bust.