Right, so let’s get this out of the way early.
Bitcoin, the controversial ‘digital currency’, has just punched past AU$9,000 in value. That’s right, this cryptocurrency that to some is ‘backed by nothing’ costs over AUS$9,000 to buy.
Mind bending right?
Considering around one year ago it was languishing around AU$1,000 it’s quite the turn of events. In fact it’s increasingly looking like Bitcoin is going to roar past AU$10,000 very soon.
Actually to be honest, it’s already gone past AU$10,000 on some crypto exchanges. On the bigger exchanges it’s still well over $9,000. At the time of writing this morning, it’s at AU$9,224.39.
Right. That’s that sorted. You know bitcoin is eye wateringly high in ‘value’.
Now the good stuff.
Why is it so ‘expensive’? Why have the last three months seen it nearly triple in value? Is it too late to get in? And what happens to Bitcoin next?
Let’s cover each one of those points…
Why is the price of bitcoin so high? And why so quickly
This isn’t an easy question to answer. The reason is there are a number of contributing factors in play here.
Some of these factors are good. Some are bad. Some are just the natural evolution of what we’ve been saying for the last five years.
One year ago to the day one single bitcoin would cost you US$731 to buy. Now when we say ‘buy’ we mean with fiat money. That could be USD or AUD or GBP…whatever. You would use that money on an exchange such as Coinbase, Coinjar, LocalBTC, etc. to purchase bitcoin.
Now you might not think it but one year ago, there weren’t that many people really talking about bitcoin. We were, so it’s possible you knew about it then. Still, the mainstream media wasn’t really all that involved. When they did discuss it, they usually viewed it as a curiosity. After all, back then the price of gold was still higher than bitcoin.
But then the price started to climb. And more people started to get involved with the story. More people started to join exchanges like Coinbase and get themselves some bitcoin.
And this created a snowball effect. More people started to see stories popping up in the papers and on TV. They started talking about it with friends and family. They started talking about it at the pub, on the train and everywhere.
More people started to get interested. And still the price headed higher. Then government started sticking their noses in. They spoke of regulation, scams, risks and danger.
Then Wall Street decided it was all one big Ponzi scheme…tulip mania. Some of the biggest investors in the world hammered the idea of bitcoin and cryptocurrencies.
China banned it. The US securities exchange commission (SEC) drafted up guidance. The US senate started talking about money laundering and terrorism with cryptocurrencies.
Before we knew it bitcoin and crypto were plastered all over primetime news. Headlines on major sites like Bloomberg and BBC were all ‘bitcoin, bitcoin, bitcoin’.
The mainstream picked up on this story (again) and the price continued to rise. And more people started to pile in as the value went up and up and up.
Then the ‘fear of missing out’ (FOMO) phenomenon kicked in. And anyone that didn’t have bitcoin was seen as a fool. Those that had it or were new to it were investment geniuses. It was something where you couldn’t simply go wrong.
And then the price crashed. Well, it fell by about 30%. That was enough to scare the heck out of ‘noobs’ to the crypto world.
But still, it got more attention. And people started to figure out the benefits of it all.
A decentralised, distributed payment network. Borderless, anonymous, and able to exist financially outside of government control.
It has a lot of appealing factors. More people bought in. And more. The network continued to grow. Soon enough we found ourselves at a point where the snowball effect took off.
More people are waking up to the potential of bitcoin and cryptocurrency. More development and innovation is happening in this space than any other industry in the world right now.
We are at the precipice of a financial revolution, and people want a slice of the action.
But the danger this presents is the speed, ferocity and the motivation for people who are new to bitcoin. You see, I think that long term this is just the start. But short term a lot of people may very well get burnt.
Is it too late? And what next?
The speed at which we’ve seen bitcoin go from around AU$1,000 to $9,000 is mind blowing. We expected it would happen. We didn’t expect it would happen this fast. And that’s a little worrying.
You see, we believe the motivation for many people getting into bitcoin now is simply to make fast gains in fiat money. That means they buy into bitcoin following the FOMO and hype, and only have the intention of ‘cashing out’ and selling back into fiat money.
This is behaviour that is reminiscent of a bubble. However there’s a crucial distinguishing factor that says this isn’t a bubble. It’s the fact the underlying technology and benefits of bitcoin far outweigh its value right now.
That means long term we’ve always held the view that bitcoin could very well be worth AU$100,000 or more. But the development and expansion of its network is crucial to that. It’s acceptance by merchants and use by people as a real payment method is crucial to that.
And right now it seems as though the hype is outpacing the actual development. Now this could mean that the price could see some incredible volatility in the short term. And if you’ve come to bitcoin with the sole intention of quick cash, you’re setting up for failure.
But if you’re in it for the long haul — and we’re talking five ten years and even longer — then things are looking up.
We’ve seen huge spikes in interest and price like this with bitcoin before. It happens roughly every three years. And each time there has been a substantial price correction. But the core foundation of technology and development continues on and each time forward the network gets stronger and more powerful.
It’s quite likely this will happen again. But now we’re talking about serious money. We’re talking about people putting in thousands of dollars of money into something they don’t really know much about. They’re simply riding the hype.
The good thing is the hype is true. The benefits of bitcoin are real, and that they will usher in a long-term financial revolution. If you can see the fundamental promise of what bitcoin is designed for and what it delivers, then you’ll see that price is somewhat irrelevant.
But if you’re buying in just to cash out and are trying to make fast money, buyer beware. You probably won’t be ready or comfortable if the price plummets 10%, 20%, 50% in the space of a few days.
For those of us who have been here before, 50% falls in price are par for the course. It’s another day in the office. But for the hundreds of thousands, perhaps millions of people that are new to it all, we don’t think they’re ready for this wild new revolution.
Quite simply bitcoin is in for a wild ride over the next few years. We have our long-term view of its huge potential. Short term we can’t predict its wild swings. But we’re ready for it. We expect it. And so should you.
Editor, Australian Small-Cap Investigator