Hang around the crypto enthusiasts too long and you will hear the same claims over and over again. The latest claim made by traders is that “Bitcoin is in a bubble.” While we have seen a flood of new money rush into Bitcoin causing a hasty bull market, I remain unconvinced that Bitcoin, as well as the alternative coin market is in a bubble. Being that Bitcoin is a relatively new market with low liquidity compared to other doomsday assets such as gold and silver, traditional predictive trading analysis can only go so far. I conclude that because Bitcoin is an asset unique in it’s utility, it must be treated as a special case.
The Second Wave - The Alternative Coin Market
The first wave, and most the important wave, was the Bitcoin phenomenon. Being decentralized in its nature, Bitcoin is a cryptocurrency outside the realm of traditional financial structures which allows all freedom lovers to have full control over their wealth. After the 2008 financial crash, people threw money into this highly speculative and unknown asset to protect their wealth. After the initial surge, Bitcoin corrected over the next few years, going from a top of over $1000 to $200 USD.
The initial surge was an important event for blockchain technology, for forward thinking entrepreneurs worldwide saw it’s potential, but agreed that Bitcoin needed more to go mainstream. If Bitcoin is the cake, the Altcoins is the icing. The altcoin surge, or the “Second Wave”, debatably started around June last year. Slowly, Bitcoin is losing, and is continuing to lose its dominance in the cryptocurrency world to alternative coins. The reason is simple. Alternative coins are building on top of the Bitcoin framework; some of the development may be services such as decentralized cloud sharing, private transactions and smart contracts to name a few. Other benefits may include profit sharing and buybacks. In other words, alternative coins now provide more utility for the end user and this surge of new money is a reflection of such. It is of no surprise that we see Bitcoin now competing against Ethereum.
Something is wrong
Traditionally, when markets get shaky, we tended to move our money into doomsday assets. Historically they were hard assets like gold and silver, but this can also be extended to anything you can touch that has value. Bitcoin is latest doomsday asset. But something is different here. Bitcoin cannot be touched; it is not a psychical thing. But Bitcoin does hold value because it is speculative and you can buy things with it. Furthermore, it cannot inflate like fiat due to it’s limited supply. But it’s main feature is much more dynamic because it operates outside of traditional financial systems, allowing users to take full control over their money. Those old enough, and unfortunate enough to remember bank runs, will know that leaving your money in the bank does not guarantee the withdrawal of that money. Banks, now with full ownership of your money, speculate with it and lend out more than they have in reserves. Furthermore, even if one is able to withdraw in a crisis, there is no guarantee your money holds anywhere near the same purchasing power.
The common man, however, doesn’t know the ins and out of the financial system. But they do know something is wrong. Politics wise, we have seen backlashes against the “establishment” as a whole. The rise of Donald Trump, love him or hate him, almost serves as proof that the people sense trouble and they felt compelled to “throw a spanner the works”. We live in an age of uncertainty and fear. One can only hear the drums of war beginning to pound as countries build alliance networks as condense as World War I. Something's about to blow. It is my view that it is this uncertainly of the future that is driving the Bitcoin surge. In order to fully understand what has brought us to this point is a firm understanding of the fundamental rules of economics.
The Austrian Business Cycle
The Austrian Business Cycle gives us an understanding on how business cycles occur. In brief, according to the Austrian theory, central banks and governments alter the natural signals of the market which, in turn, misleads entrepreneurs into purchasing malinvestments. Entrepreneurs believe there is a higher potential demand than reality has it and as a result, high order production capital goods are overbought. Entrepreneurs begin to fighting over resources, pushing the price of high order goods up. This leads to lower profit margins and loses. Once the entrepreneurs figure out they have been mislead, a depression incurs.
This insight is particularly important in understanding why Bitcoin is surging. As Bitcoin is a global currency, one must not analyze one central bank, but all central banks. Central banks worldwide have been manipulating their fiat currencies for years and the endgame is coming near. Manipulations include, low interest and federal funds rates, extensive open market operations of bailing out “bad debt” and keeping the zombie economy alive by “servicing the debt”. Furthermore, this also is one explanation why war, a mechanism that props up the value the dollar specifically by maintaining the petrodollar and conquering resources. It is this bleak outlook that I conclude that central bank policies around the world have lead to the surge of money pouring into Bitcoin.
Conclusions
I certainly agree that Bitcoin is not immune to market fluctuations. Traders will continue to manipulate the price and speculators will take their profits once there are dips. I, however, predict that the overall trend is upwards (with a couple of bumps along the way). Bitcoin is not only getting widespread press, but is now becoming legal in many countries. Whilst assets like Gold and Silver serve as the traditional doomsday assets, I personally think Bitcoin, or another alternative currency, is a more realistic approach for governments worldwide after the fiat ponzi scheme collapses. As the date of collapse inches closer, I conclude the world will be enticed by Bitcoin and its alternative coin market due to its decentralized and speculative nature.
3rd Stryker