Investors Beware of the Bitcoin 10,000 Bubble

The bitcoin (CURRENCY:BTC) price chart truly is an incredible thing to behold. 2017 gains have been extraordinary: even after a recent pullback, Bitcoin still has risen nearly 600% year-to-date. The move has caused skeptics to predict a “Bitcoin bubble,” while supporters to call for “Bitcoin 10,000” by year’s end.

Investors Beware of the Bitcoin 10,000 Bubble
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Looking back even further, the gains are almost impossible to comprehend. In dollar value, Bitcoin has risen more than 20 times in just the last two years. More incredibly, its current dollar value is 581 times its value of five years ago. A $5,000 investment in November 2012 would be worth $2.9 million at current prices:


The gains are staggering, simply put. And it’s worth comparing the rise in Bitcoin to other bubbles to show just how unbelievable the gains have been.

The Tulip Bubble

What most historians call the first “bubble” was the mania that surrounding tulips in the Netherlands in 1636-37. Stories — whether true or false — abound about the sailor who was jailed for mistakenly eating a valuable tulip (he thought it was an onion) and the Englishman jailed for ignorantly peeling back a particularly valuable specimen.

Price data from the time, obviously, is difficult to find, but economist Earl A. Thompson cited a 20x increase in future contracts in just six months between 1636 and 1637.

Bitcoin’s rise hasn’t been quite as fast — but it’s been close. The currency’s dollar value rose 20x between October 2015 and October 2017 — a period of 24 months. And, in fact, Bitcoin’s first big run in 2013 — from under $14 to over $800 — represented a nearly 70x gain in a year, a faster rate of increase than what was witnessed with bubbly tulips.

The Bitcoin price chart would turn downward for the next 20 months, before the rises started anew.

The Dot-Com Bubble

One potential bit of good news for Bitcoin investors is that huge gains don’t necessarily, in and of themselves, require a bubble. That’s a lesson oddly proven by the dot-com bubble.

The best-performing stock of 1999 (with a share price at the beginning of the year above $5), according to a New York Times article, was Qualcomm, Inc. (NASDAQ:QCOM). QCOM stock rose 2,619% — greater than Bitcoin’s two-year performance. The year before, it was, Inc. (NASDAQ:AMZN), which rose more than tenfold in 1998.

But even those gains show caution about buying into huge moves. It would take Amazon stock over a decade to surpass its late 1999 high. QCOM stock — as successful as that company has been — has never done so. And there were a number of other, bigger gainers that quickly collapsed., a supposed dot-com financing company, went from under $1 to $111 in eight months — a 10,000%+ move that dwarfs even the steepest Bitcoin gains. FreeMarkets was supposed to go public in 1999 at $14 to $16 per share. It was priced at $48, and hit $341 in a month.

Those moves sounds insane — but they are only different from Bitcoin in degree, not kind. In all of these cases, decades of returns were compressed into just a couple of years, if not months. In all of the cases so far, those who bought at or near the top wound up losing and, in most cases, losing big.

Is Bitcoin 10,000 Realistic?

The broad point is that for the current Bitcoin price to even hold — let alone for predictions of Bitcoin 10,000 to come true — Bitcoin has to be fundamentally different as an investment. Obviously, Bitcoin, being a currency, is fundamentally different from tulips, dot-com stocks, Beanie Babies and the myriad other fads to which it’s been compared.

But I’m skeptical it’s different enough — and I’m highly skeptical of the argument that Bitcoin adoption necessarily means higher prices. The point of bubbles is not that the underlying asset is worthless. Tulips were hugely popular in the Netherlands in 1635 and 1638, too. Las Vegas houses were worth something in 2009. So was stock in Amazon, Qualcomm, and many of the dot-com era high flyers. (Admittedly, some were just frauds, or something close.)

Bitcoin can be a success of some kind as a currency and still be dramatically overvalued. This isn’t a binary choice, where, in a year, it’s either Bitcoin 10,000 or Bitcoin zero.

Deriving the fair value of Bitcoin is functionally impossible — but the chart at the least gives a clue. When anything trades the way that Bitcoin is trading right now, it’s destined for a huge, painful fall. Maybe Bitcoin is different… but I don’t believe it’s that different.

As of this writing, Vince Martin has no ownership of bitcoin, and no positions in any securities mentioned.

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