#Bitcoin is a digital currency per se. It is commonly quoted in USD Fiat money. Note: Today, the dollar accounts for roughly two-thirds of all financial and economic transactions globally.
Money is defined by three characteristics:
1. A storehouse of value
It’s hard to determine if bitcoin is a storehouse of value. Daily volatility tops 5 percent to 10 percent while its “value” has skyrocketed. If it crashes, it will fail to meet criteria No. 1.
2. A unit of account
It is commonly identified with Gold as a safe haven currency, due to its limited supply and perceived value. It has a potential of taking a minute portion off Gold market cap. which is currently hovered around USD 8 trillion. A 2.5% share of Gold market cap. will create about USD 9,524 per Bitcoin. It is in that sense, considered favourably as a unit of account to people who believe Bitcoin as digital Gold 2.0.
3. A medium of exchange
As of now, there are only few users (restricted mainly to more adventurous food and beverage establishments, around the world) .
Convertibility is suspect in some nations where bitcoin exchanges have been banned, creating some confusion as to how the currency can be used. To complicate matter, there is suspicion that some of the transactions came from use of cryptocurrencies in the “dark web” for a wide variety of illicit activities, from money laundering to drug dealing to prostitution, among others.
Additional issues involve sovereign nations and their desire to maintain control of their respective currencies and money supplies that make widespread use of bitcoin unlikely in the very near term.
Overall Conclusion: The intrinsic value of Bitcoin, as a currency with stored value and as a medium of exchange are still a long way to go before being accepted by the general public.
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The daily value of foreign exchange trading tops $5 trillion, alone, while bitcoin does a mere fraction of it.
In 2016, average daily transaction value hovered between USD 20 to 30 million.
In 2017, the average daily transaction value skyrocketed from around USD 22 million (January 2017) low base to as high as USD 535,735,154 (September 18, 2017).
Is Bitcoin In A Bubble?
From looking at the overall cryptocurrency trading price pattern this year, it is hard to disagree that it matches the shape of a standard bubble pattern.
There is no such a thing as a healthy bubble, this is it,” the Economist stated recently. Forbes predicted that all the recent cryptocurrency gains are one large bubble.
Let look into what constitutes a bubble. Dr. Jean-Paul Rodrigue, who became famous for creating the “Phases of a Bubble” chart – a specific, investor-oriented variation of Gartner’s hype cycle.
Dr. Rodrigue, a professor at the Department of Global Studies and Geography at Hofstra University in New York, became well known for his bubble model in 2008. His model and chart are often cited and used to predict bubbles in many investment types, including stock markets, bond markets, housing markets, and now, cryptocurrencies.
The market goes through four distinct stages in turn; Stealth, Awareness, Mania, and Blow-off.
In the first phase, Stealth, only investors “who understand the new fundamentals realize an emerging opportunity for substantial future appreciation get involved in the asset,” Dr. Rodrigue explained. “Prices gradually increase, but often completely unnoticed by the general population.”
Early adopters began investing in the digital currency via mining equipment the year it was created, and then directly into bitcoins themselves the following year, 2010. Making many of them multi-millionaires.
The second phase, Awareness, is described as the period of time when “Many investors start to notice the momentum, bringing additional money in and pushing prices higher,” Dr. Rodrigue explained.
Till 2016, cryptocurrency experts estimated that there were less than 1% of the world population had even heard of bitcoin and if they do, it is associated with high risk investment product (better to be left alone).
2017 is a turning point in term of people awareness. More people started to pay attention to Bitcoin, due to its skyrocking prices with each passing week/weeks. The cryptocurrency exchanges’ participation rate have increased tremendously throughout the year. . Take Coinbase signups, for example, it had increased by 100,000 users, in 48 hr to 10.5M users in September 21, 2017. That’s 1.388 users per hour!
This is also the phase where institutional investors start to invest in the asset.
In the Mania phase of this bubble cycle, the media starts to notice with positive reports about how this new boom benefits the economy by ‘creating’ wealth; those getting in becoming increasingly ‘unsophisticated’. In the final phase of the bubble model, Blow off, “everyone roughly at the same time realizes that the situation has changed,” leading to many trying to unload their assets. Meanwhile, “everyone is expecting further price declines,” according to Dr. Rodrigue’s model. “Prices plummet at a rate much faster than the one that inflated the bubble.”
Which Phase Is Bitcoin Now?
From the above analysis, we could conclude that Bitcoin is transiting into early third phase, the mania phase of the Bubble Cycle.
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Flash News (31-Oct-17): CME Group Inc. is planning to have Bitcoin Future Contracts listed in its exchange before end of this year – The implication is volatility of Bitcoin currency can be hedged! It addresses a major concern of Bitcoin’s usefulness as a stable stored currency.
CME Group Inc. (Chicago Mercantile Exchange & Chicago Board of Trade) is an American financial market company operating the world’s largest options and futures exchange.
If you would like to know whether you are ready for it, please read my recent post on “5 Tips To Trade Bitcoin Or Volatile Cryptocurrency”
For cryptocurrency starter, you may like to consider opening an account with Coinbase, a secure online platform for buying, selling, transferring, and storing digital currency.
Note:- If you buys or sells US$100 of digital currency or more through Coinbase using this link, you and your referral will both get US$10 worth of free bitcoin.
Disclaimer: This article should not be taken as, and is not intended to provide, investment advice. Please conduct your own thorough research before investing in any cryptocurrency.
If you’ve any comments, please drop me a line.
Reuben Ong
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