Bitcoin’s tremendous appreciation in 2017 was certainly a big surprise for many people in the financial sphere and it has attracted still more interest around cryptocurrencies at a time when our societies’ digitalization is a key topic for banks, corporations, governments and individuals. A lot has already been said and written about bitcoin, but here are some ideas suggested by recent events on this intricate and thrilling topic.
A very speculative asset, to say the least
Bitcoin's price
Bitcoin’s price was around $17,600 on December 15th against $4,171 at the end of September (fourfold increase) and $ 952 at the beginning of the year (more than eighteen times increase). The 90-day historical volatility fluctuates between 80% and 90%. Except for someone with a particularly ingrained speculative spirit, to go long bitcoin is now a daunting proposition. The future will tell us whether bitcoin’s run over the last two years was a new illustration of the greater fool theory, according to which irrational beliefs and expectations drive asset prices : as long as one believes someone else will pay a higher price to get an asset, any price becomes justifiable !
Bitcoin’s fever remains a « micro-event »
Bitcoin’s market capitalization is now around $ 295 billions. Not really a paltry amount by itself. It is equivalent to the 6th market capitalization of the Dow Jones index and the 13th in the S&P 500. But it just represents 1,26% of the total S&P market capitalization and 0,65% of the MSCI World market capitalization. As a currency, bitcoin’s market capitalization is just about 1,2% of the global M1 money aggregate of the United States, Euro Area, Japan, China, India and Brazil. Should bitcoin lose 50% of its value, the $150 billion digital wealth destruction would remain an idiosyncratic event, nothwithstanding a big hit in the media and a bad experiment for bitcoin’s holders. It would remain an episode of startling speculation, good for a spicy story in newspapers and TV shows, but without repercussion at the macro-level.
A highly uncertain intrinsic value
Bitcoin is just a medium of exchange but not a money yet. To get such a status, it would need to become a generally accepted medium of exchange. More usage would entail more demand and so on, in a recursive process whose end is unknown at the present time. On the supply side, even if the number of bitcoins in circulation is limited, other cryptocurrencies already exist or may be still created in the future, adding to the uncertain value of the bitcoin. Money transactions in bitcoins remain an insignificant part of payments in the world and bitcoin cannot already pretend to be the next « winner takes all ». It is too early to be assertive about its final success within the cryptocurrencies’ ecosystem. Even the destiny of cryptocurrencies is uncertain as it will not be so easy to supersede fiat currencies. Governments and central banks will protect their positions resolutely. Furthermore, a stable value is highly required for a money to become a reliable instrument. Ample fluctuations accompanying bitcoin’s emergence act as a brake for its development.
The newsflow feeds the fever
The introduction of rival futures contracts by CBOE and CME is a significant stage in bitcoin’s emergence from the crypto-punk community. It may be considered to be a sign of institutional recognition for cryptocurrencies by the financial community, increasing still more the mania around bitcoin. The possibility to go long and short on bitcoin might help to improve the price formation mechanism and attract new players in the market. Still, it is quite impossible to anticipate what might occur for bitcoin’s price following this major initiative, but it remains a risky bet in the short run because of its wild gyrations.
The dubious flight-out-of-fiat-currencies’ argument
Some consider bitcoin’s appreciation as a manifestation of distrust toward main fiat currencies after years of massive liquidity injections by central banks. This argument would be more convincing if the price of gold was also on the rise. But gold just went up 11% year on year an its annualized volatility remains slighlty above 10%.
Bitcoin’s asset price play trumps the payment innovation
Bitcoin's price variation
Because of all these uncertainties, significant gyrations in bitcoin’s price are to be expected as a trial and error phase is unavoidable for such a new technological instrument. Bitcoin is logically and inherently a speculative asset and one should not be astonished or shocked by what is presently going on. Beyond this speculative outburst that might end badly, the question of payment systems and money usage in the future should be the main focus.
Will cryptocurrencies market share increase in the coming years against fiat currencies ?
Will a serious set back in price compromise the present faith in bitcoin ?
Cryptocurrencies deserve our attention as other big digital innovations of the day do. As a medium of exchange’s utility and worth rest on its ability to finance transactions and not on its ability to have a ceaseless rising price, bitcoin is a burning proposition, eligible for the followers of the most extreme risk-return bets.
