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December 12, 2017

Bitcoin FOMO: The Bubble is Real

There was a time - not that long ago - when few had heard of cryptocurrencies, such as bitcoin. To the informed, bitcoin was hailed as an alternative digital currency threatening to subjugate traditional currency. Back then, the early adopters invested in bitcoin believing the premise of the underlying technology and the need for an alternative means of payment.

Today, things are different.

Today, there is a growing number of people interested in investing in bitcoin simply because of its ludicrous performance over the past year. Most people are now investing in the hopes that the wild streak continues, and that they can sell to the next sucker who comes along at a higher price. This is a classic characteristic of a bubble.

Massive FOMO is fueling a speculative frenzy as news about newly minted bitcoin billionaires hits the press. The allure of easy money once again strikes. On December 7th, the Coinbase app – which lets you buy, sell and store bitcoin – hit number 1 on Apple’s US app store, as bitcoin madness spreads across the population. Guess what will be a topic of many Christmas dinners across the world?

Those with a vested interest – perhaps they are part of the 1000 people who own 40% of bitcoin – attempt to rationalize the frenzy using words like ‘new paradigm’. In a world that is trying to stick it to the ‘man’, an underdog alternative currency is sexy and appealing. However, there is no rational explanation for bitcoin’s 1500%+ price increase over the past year.

Here are some cold hard facts about bitcoin:
·         Bitcoin is not a currency because you can’t pay taxes with it.
·         Bitcoin is not a store of wealth because it is far too volatile and has no physical manifestation.
·         Bitcoin is not an investment because it does not represent a stake in a future cashflow.
·         Bitcoin is not a means of transaction because so few merchants accept it as payment, and likely never will due to bitcoin’s volatility.

Yet, people are clamoring to invest in this esoteric enigma. Over the past couple weeks the search term “buy bitcoin” skyrocketed past “buy gold”. Gold – another entity valued primarily on sentiment – occupies the same mental space as tulips, and Beanie Babies. As with bubbles past, conceptually finite supply and theoretically infinite demand do not justify unbounded price appreciation.

Sentiment is driving the bitcoin bubble. Today, sentiment loves the story. Tomorrow? Who knows. Sentiment can turn on a dime, usually for unforeseen and sometimes unexplainable reasons.

Indeed, a subtle shift in the winds – perhaps triggered by a butterfly flapping its wings a thousand miles away – might send people scrambling for the exits. Just as a speculative frenzy doesn’t make sense on the way up, it hardly makes sense on the way down.

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