With Bitcoin reaching an all-time high of over $10,000 per “coin”, it’s important to consider whether this is a sign of its impending “adoption” or whether it could be a bubble.
This tutorial aims to explore the “future” of the “currency” and whether the current price is an indicator of a deeper reach for the technology, or whether the majority of retail “investors” have been lemmings yet again (probably the latter).
Before we begin, it must be stated that we are not regulated to give financial or legal advice, and as such we need to be crystal clear that this is article is meant for education and entertainment purposes only.
Mentions do not equal endorsements, and as such you need to appreciate that if you do wish to become involved with all the “crypto” hype, you should seek the advice of a financial adviser first…
The big thing to understand about Bitcoin – which has drawn the ire of many leading names in the “investment” community – is that it holds little to no value of its own.
This is important, as it’s where the determination of the “price” would come from if “Bitcoin” was a stock or some other form of regulated security. The fact that it does not ascribe to even the most fundamental investment criteria has painted it with a HUGE black mark in the boardrooms of some of the world’s leading financial institutions (who often call the shots on many of the securities offered for sale in the likes of New York or London).
As such, you must appreciate that the way most institutional investors have looked at the “currency” is with immense skepticism. This is not to say it’s not a worthwhile “investment”… just that none of the major banks or money managers have gone near it (at least publicly).
The main reason why the big shots don’t like Bitcoin is because it has no real “reason” to have a price at all. The core of investing is something called “value” (which is basically how much a security/asset is worth to someone else). Value can come in many forms… investors typically look at these (analyse them) and then come to a conclusion about the overall “intrinsic value” of an asset.
This intrinsic value represents how much a stock, share, bond, commodity, or any other “token” of value would fetch if the world was nuked tomorrow. If Coca Cola had to start again, or Microsoft, or IBM – what’s the core “value” of their offering. From here, the analysts are able to determine a price for the respective assets, which gives them the ability to determine whether the market has undervalued or overvalued the asset.
The way most “money managers” become wealthy is to use leveraged capital to purchase securities / assets when they are undervalued (cheap) and then sell them when the market finally catches up. This is basically what Warren Buffet has done for his whole life, except he doesn’t sell, he buys and “holds”. This type of investing is known as value investing.
To apply these principles to Bitcoin would give you an approximate price for the asset, and thus an idea of whether the “coins” (whatever they are) are worth.
The problem is that there is currently no way to gauge the “price” of a “Bitcoin” because they have very LITTLE value right now. The “price” the secondary market has allocated them is almost entirely based on speculation and hearsay – the typical approach that retail traders will apply to trades (whether it “feels” right). Find out more on Fortune.com
As we all know, the way it works (presently) is that someone will buy a “coin” for $5,000, hold it for 8 weeks and then “sell” it for $8,000. This gives them $3,000 in profit, which is directly from the guy who just paid $8k. Thus, in order to keep the price growing, a fresh source of new liquid capital has to be injected into the system – which now looks like truck drivers, postal workers and dentists putting “life savings” into the purchase of coins.
The point is that the current “price” is almost entirely nonsense and should be not be used as a bulwark of value AT ALL. Instead, if you want to gauge exactly what’s happening in the “Bitcoin” world, you need to appreciate how the “coins” actually work, and what that means for their wider “market” moving forward…
Bitcoin’s TRUE Value…
The smart money is actually looking at the “behind the scenes” part of the Bitcoin system – at something called “blockchain”.
Blockchain is a piece of software which creates decentralized databases on 100’s or 1000’s of systems around the world. The argument of many “intelligent” “Bitcoin” buyers has been that the “currency” represents the adoption of this new “groundbreaking” technology.
With this in mind, it’s quite important we look at this underlying technology before then moving onto the wider issue of “Bitcoin” itself…
Blockchain was developed in 2008 as a way to create decentralized databases for a myriad of applications. The idea was that instead of downloading your emails from a central system, you’d be able to access them from anywhere in the world as they’d be available 24/7 on 100’s or even 1000’s of servers (known as “nodes”) which would host a synchronized version of the same “blockchain” database.
The point of “blockchain” is that it works by creating “chains” of data. These chains allow users to manage, edit and update the data by adding “blocks” to each chain. The blocks don’t have to be “new” data – just needs to update the dataset. So with the email example, a new “block” may add extra emails to the data chain, but could also mark others as “read” etc.
Blockchain offers a number of benefits over “traditional” data storage in that it brings data versioning directly onto computer systems, allowing users and network administrators to create “data” that is not only accessible (via the 100’s of servers it’s stored on) but also entirely transparent (each “block” in the chain can be loaded up – which is essentially the equivalent of “versioning”).
The part where “crypto” currencies play in this system comes from the data integrity it may have. Since all the data is entirely open to the public, certain amounts of it need to be encrypted to stop it being revealed to those who shouldn’t have it. As such, “crypto” (cryptographic) currencies were introduced to make sure that certain “blockchain” databases were encrypted so that only particular people (who had the decryption token “coin”) could read them. This is where these coins came from.
The point here is that whilst “blockchain” has value, the idea that it is translated into the “Bitcoin” ecosystem is a misconception. Blockchain – much like the “web” – has very little commercial value in its own right. The value comes from the content that can be accessed through it. In the case of “blockchain”, this content will likely be transactional.
As such, to determine the “value” of Bitcoin, you’re really looking for whether the system will be adopted globally or not. If not, the current “price” of the coins is false…
Will It Be Adopted?
The basis of Bitcoin’s “value” rests on whether a “marketplace” or some other peer-to-peer application can be built with the new “blockchain” infrastructure.
Whilst this remains to be seen, the reality is that the system is in dire need of an Amazon, Microsoft, Facebook or Google. Most of the smart money is waiting for one of these monolith type companies to grow and give precedent to much of the hype about “crypto”.
The problem is that even if a company of Alibaba proportions is built on top of the “blockchain” idea, it will likely do away with “bitcoin” entirely. Bitcoin, Ethereum etc are all first generation coins, which means (like most of the first generation search engines), they’ll just be pushed aside by something better.
So to answer the questions… no, the likelihood of bitcoin being adopted as anything even remotely resembling a “currency” is slim. As such, it’s our opinion that its price is definitely too high as it stands, which is why we feel the whole thing has the air of a “bubble” around it.