Bitcoin hit $17000 this week in a continued frenzy that featured the launch of Bitcoin futures on CBOE Glogal Markets. Volumes were muted, numbering less than three thousand contracts, but the perceived legitimacy of a regulated market trading crytpcurrency sparked speculation that Bitcoin could hit $50,000.
Bitcoin hit $5000 in October, $2500 in June, and started the year at less than $1000 per coin. The Bitcoin blockchain has split twice this year, once in the creation of Bitcoin Cash in August and again in the creation of Bitcoin Gold in October. While the splits in the Bitcoin blockchain ledger have served to propel the rally in the original Bitcoin cryptocurrency, the major cause in the rise in price appears to be directly related to increased cash chasing an illiquid thinly traded market, as well as “painting the tape” activity between Bitcoin miners.
So, should we all be dumping our greenbacks for Bitcoins and be virtually stuffing them into our mattresses? I’d hold off on that (1).
Why? Well, for one thing, because Bitcoin and most other cryptocurrencies are not money. That’s right, Bitcoin, because it has no intrinsic value, is a lousy medium of exchange, and is a dubious store of wealth. Instead, Bitcoin is just a commodity. In fact the U.S. Internal Revenue Service says so. And in the case of virtual currencies like Bitcoin, the Service has struck to the core of what they really are–mediums of exchange whose value is only what interested parties are willing to pay for them. And for now, most of those parties are speculators, criminals, terrorists, money launderers, anarchists, and fiscal libertarians.
For another thing, Bitcoin is going to be losing its anonymity. The IRS has been actively pursuing Bitcoin exchanges for 1099-MISC, 1099-B, 1099-K reporting of Bitcoin transactions in an effort to collect the U.S. government’s cut of the proceeds. This will eventually bring tax avoidance to a halt, as well as make cryptocurrency a less friendly place for the social undesirables that currently lurk among large holders of Bitcoin.
So if Bitcoin isn’t really worth $50000, $17000, or $1000, what is its real value? Since Bitcoin is not backed by any store of wealth (such as gold) and cannot be used to pay taxes (the main virtue of a fiat currency), why does Bitcoin trade at all? In short, the answer is security. Bitcoin has value because it provides a service–a way of transacting commerce in an transparent and secure manner (at least as long as the blockchain–or distributed ledger database–remains secure). In theory if one Bitcoin is valued on any given day for $17000 USD, then this is the value being placed on currency transparency and security on that date. However, because there is a significant speculative bubble in Bitcoin since the end of 2016, it makes more sense to look at the price of the cryptocurrency in its first three years of trading. Prices ranged between $100 and $600 during that time.
The bottom line is, if you must speculate in Bitcoin, don’t hold it. Convert any holdings into other forms of currency, securities, or commodities. Because if you have to get rid of a lot of it, you aren’t going to be able to when you need to.
(1) JP Morgan Chase CEO Jamie Dimon called bitcoin in September 2017 a fraud worse than tulip bulbs.