Today was a legendary milestone for Bitcoin, the most comprehensive used cryptocurrency as it crossed the 50,000 marks as it continues to attract retail and institutional investors worldwide.
Bitcoin's meteoric rise would constitute an understatement. If we consider Tesla for a second, traditionalists would call the stock "overvalued" or "expensive" at just over $780 billion market cap, where Facebook, which is slightly smaller by market cap, is generating a profit multitudes higher than Tesla currently is.
Tesla's value comes from investors believing they will sell more cars in the future. However, with Bitcoin? Its value comes from investors thinking it's going to be worth something more in the future – a self-fulfilling prophecy if you will.
Who knows. Is it expensive? Not quite sure. However, if you invested at the same time last year, you would have been purchasing the cryptocurrency near an all-time high, around $19,500 per coin. If you have the kahunas to hold one single coin till now, you would have returned 390%. Not bad for something that has no intrinsic value.
This rise has been fueled by the recent institutional interest in the coin.
Antoni Trenchev, managing partner and co-founder of Nexo in London, a large crypto lender, stated that "Whether it's Musk, Mastercard or Morgan Stanley, the mood, music and momentum is impossible to ignore."
Antoni may be onto something. The interest in cryptocurrencies is inducing many retail (and possibly institutional) investors to FOMO (Fear Of Missing Out) trade into the cryptocurrency, pushing its price further higher. However, this comes at a warning from the Financial Conduct Authority of the U.K., stating that "if consumers invest in these types of products, they should be prepared to lose all their money."
Earlier this month, we talked about GameStop and its meteoric rise to and downfall. I compared it to the Tulip Mania in Holland back in the 17th Century, and stated that it wasn't quite like the Tulip Mania. With Bitcoin, the comparison is a little bit more appropriate.
With GameStop, even though they were valued at some $25 billion ridiculous valuation, they could hypothetically justify it by selling PS5's at some insane markup and generating billions in sales. However, with Bitcoin? The price derived is from the belief that it will go higher. If enough investors believe it will go to $100,000, investors will buy it at $60,000, $70,000, $80,000, $90,000 and $99,999.
Many chose to state the fundamental justification when trying to justify Bitcoin's price tag is the technology behind blockchain. The speed, anonymity, and self-governing characteristics make it one of the most fascinating technologies of the 21st Century. However, that technology is relatively open-source – one can create a cryptocurrency in hours (See: DogeCoin).
So is Bitcoin all part of a Mania? Have we been brainwashed to think that Bitcoin is worth more than the letters and numbers it's stored in?
Here is a fun exercise. I will take the Tulip Mania explanation I wrote a couple of weeks back when I talked about GameStop, but instead, replace it with Bitcoin.
"In the early 1600s, Bitcoin first arrived on the shores of Holland from Turkey. The flower was exotic, beautiful, and nothing like any other flower that grew in Holland at the time.
Like Turmeric was to the U.K. before exploring India, Bitcoin became an extremely exclusive and highly luxurious status symbol. It was stated that "it was deemed a proof of bad taste in any man of fortune to be without a collection of bitcoins." Bitcoin became a thing to have to "keep up with the Joneses" at the time. Therefore the middle class started to collect Bitcoin to portray this image of wealth.
This demand and love for Bitcoin inflated the cost of Bitcoin, with the rarest Bitcoin in the year 1636 going for $750,000 in today's money. However, many Bitcoin ranged from $50,000 – $100,000. At this point, Mania ensured. Individuals who held extremely rare Bitcoin saw their assets increase in value just by having it. People believe the stock price could never go down and that "the passion for Bitcoin would last forever."
Individuals started buying Bitcoin on leverage and began to use derivatives in hopes that they would profit from borrowed money. However, as confidence started to waver, Bitcoin owners started offloading as fast as possible. This meant people with derivatives were selling at a lower price they bought it at, desperately trying to offload so they could pay their creditors. By 1638, Bitcoin prices returned back to normal."
Obviously, there are fundamental differences between Tulips and Bitcoin. For one, each Bitcoin is the same, and that one could value a specific Tulip at a different price from another person. However, the rarity factor still exists.
There was a recent Bloomberg Opinion article talking about the investors in Bitcoin. To summarise, they stated that given the fluctuations in the price of Bitcoin, Bitcoin investors might be just as or even more impressive than the actual Bitcoin itself – and I would have to agree. Investors who believe Bitcoin will reach $100,000 grasp onto something so non-fundamental it is foreign to many traditional investors, including myself. However, it may just be correct enough to work.