The stock markets around the world continued to quietly churn higher in the 3rd quarter. Somewhere, the phrase “the most hated bull market in history” was coined to describe the steadily upward trajectory of this bull market that began in March of 2009. Though slightly overvalued, its valuation still falls within a range where its future direction is impossible to predict. With the possibility of stimulative actions by the federal government and the lack of significant inflation in wages or prices, the markets, absent of any outside shocks, may continue along its positive path. The only “asset class” that might be in a bubble is cryptocurrencies like bitcoin so we thought we would review.
Bitcoin and Tulips
At least then you got a tulip, now you get nothing. – Nout Wellink, former president of the Dutch Central Bank
What Is Bitcoin?
Bitcoin is a new currency that was created in 2009 by an unknown person using the alias Satoshi Nakamoto. Bitcoin is a currency unlike any of its predecessors. It exists only in the digital world and strives to make all transaction untrackable, its system uncrackable, and distribution of coins decentralized. Transactions are made outside of the banking system. There are no transaction fees and no need to give your real name. According to Cambridge University, as of early 2017, the value of bitcoin currency “in circulation” was around $100 billion and there were between 2.9 and 5.8 million active users.
Who Uses Bitcoin?
Because of the nature of bitcoin, it is difficult to identify specific users. As a transactional currency, it is currently difficult to use as few places accept them and transactions are much slower than credit cards to process. As a result, according to Fortune, the primary use of bitcoins for transactional purposes remains criminal, including drugs and cyber-extortion fees for ransomware attacks.
As a store of value, it is very volatile compared to gold or dollar denominated deposits. Despite this, there has been significant demand. According to Bloomberg, the currency is most useful to people trying to bypass their country’s currency restrictions, such as China or Venezuela, or in countries where people might be concerned about hyperinflation, such as Argentina.
Lastly, some investors have bought bitcoin for speculation.
Is Bitcoin Safe?
One thing to bear in mind is that bitcoin only exists in computers and computers have been subject to hackers. Bitcoin is not protected by any sort of deposit insurance such as the FDIC. According to Reuters, there have been at least three dozen heists of cryptocurrency exchanges since 2011; many of the hacked exchanges later shut down. More than 980,000 bitcoins have been stolen, which today would be worth about $4 billion. Few have been recovered.
Further, although the value has gone up this year, in what many believe is a speculative bubble, the price has been volatile. In 2013, it hit a high of over $1,100 before declining to a low of almost $200 in the first part of 2015.
In the end, a virtual currency’s value rests on nothing but the faith of the people that support it. Possibly the most interesting and useful thing to come out of bitcoin is its blockchain technology. It has the potential to help create more secure online transactions and digital contracts through its automatically notarized ledger. In the final analysis, bitcoin and other cryptocurrencies may or may not become more integrated with our financial lives but blockchain may grow to be the backbone of our digital experience.