There is some logic to the idea that bitcoin (CCC:BTC), as an asset class, should do well.
The maximum number of bitcoin is 21 million. The actual number is much lower. Not all the bitcoin have been “mined,” while others were lost in digital wallets, unrecoverable.
So, while central banks around the world, including the Federal Reserve, create trillions in new “fiat” currencies to fight the novel coronavirus, bitcoin numbers remain stable. If there’s something to this whole supply vs. demand thing, the cryptocurrency should be a good investment.
Turns out, not always. The crypto was worth $8,828 on May 11, 24% more than the $7,105 it was worth a year ago, so it’s been a wild ride. The price has been as high as $11,600 and as low as $4,600.
That low was just two months ago.
Volatility has been especially pronounced recently. In about one week the price zoomed to nearly $10,000, before falling over $1,000 within a few minutes on May 9.
Nouriel Roubini, a long-time bitcoin critic, thinks he has the answer. He says:
“Bitcoin crashes by 15% in 7 minutes on NO news: a rigged, totally manipulated, whales-controlled market where most transactions (90%) volumes are false as exchanges pretend to have liquidity they don’t have. Massive pump & dump, spoofing, front running, wash trading! Total Scam!”
In any market, trust is key for the controlling entity. Who controls the cryptocurrency is the subject of a lawsuit, Kleiman v. Wright. In it Craig Wright, an Australian claiming to be the famous Satoshi Nakamoto who invented bitcoin a decade ago, is defending himself against the estate of a former business partner, Dave Kleiman.
Nakamoto is said to own 1.1 million coins, worth $9.7 billion in the present market. If Wright is really Nakamoto as the lawsuit claims, he must share what he has sold with Kleiman’s estate.
On his website Wright not only claims to be the “original” Nakamoto, but says another coin, called bitcoin SV (CCC:BSV), is the “original bitcoin.”
Try to run a world economy on that.
In addition to not knowing who controls the cryptocurrency or who invented it, we’re also approaching another “halving.” The value of finding a bitcoin is due to be cut in half on May 11 to 6.25 coins, from 12.5.
The idea is that as the value of finding new bitcoin falls, fewer will be found, and the number of bitcoin that exist will stabilize. This is said to be bullish for bitcoin holders, who will suffer less dilution as a result. The total market is currently worth a little over $163 billion. That sounds enormous, but it’s about the same as Abbott Laboratories (NYSE:ABT).
Bulls like Tuur Demeester of Austin, Texas, compare what’s happening with bitcoin to the Protestant Reformation. This was a dispute over the authority of money, with the central banks acting as the Catholic Church. Cryptography is thus a better protection of value than government, he writes.
Demeester compares today’s millennial-age bitcoin investors to Dutch bankers seizing control of finance in the 17th century.
The problem with this view is that the Dutch innovation wasn’t banking, but Dutch exploitation of Indonesia’s Spice Islands. Spices like nutmeg were a representation of value in world trade then. Dutch traders seized that value by killing Indonesians. It wasn’t all double-entry bookkeeping.
The Bottom Line on Bitcoin
Gold isn’t money. Neither is bitcoin. Neither is Abbott Laboratories stock.
These are assets. Money is what happens when assets are exchanged. It’s in the trade that money works its magic. Sitting in a vault, a bitcoin wallet or an account at Charles Schwab (NYSE:SCHW), what we call money is just potential energy.
That’s why the Fed could suddenly create trillions of new dollars during the pandemic. Hoarding anything, pretending it represents the only “true” value, is a mug’s game.
Money is worthless unless it’s useful. Bitcoin was at its most real when it was buying those two pizzas.
Dana Blankenhorn has been a financial and technology journalist since 1989. He is the author of a mystery novella involving Bitcoin, The Reluctant Detective Saves the World. Follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.