“The future of money is digital currency.”
- Bill Gates
Exactly five years ago, one Bitcoin costs 21.05 USD; one year ago it costs 938.90; and today at the current time (16:55 UTC) on eToro it is available for purchase at 15 621.58 USD. Last week, the price reached an all time high of about 20 000 USD before falling back to about 12 000 yesterday. With such volatility, is it worth investing? With over 2000% gain this year, is it a bubble? Or it will keep rising and replace fiat currency?
First, what is Bitcoin? Bitcoin is the world's first cryptocurrency and is by market capitalization the world's largest with a share of 43.7% of the total cryptocurrency market. The current cryptocurrency market is worth about 600 Billion USD (that's about the size of Microsoft or the nominal GDP of Saudi Arabia). Most cryptocurrencies are based on the blockchain technology. The video below explains the basic of cryptocurrencies and blockchain.
Is digital currency the future of money? We shall never know for sure. Who would have predicted that paper money would replaced coins? And then digital transactions with bank cards and online banking was going to replace that paper money? But it is very likely that digital currencies are going to be the money of the future for two principle reasons: The globalization of capitalism and the information age. Since the end of the cold war, free markets have been growing rapidly both within countries and among them. One of the basic principle of a free market is Adam Smith's laissez faire (little or no government intervention in the economy). It is obvious that with cryptocurrencies having no central issuing authority they are going to flourish in capitalistic markets. The information age has taken us from colourless LCD display to smartphones in less than two decades. Again, this is a good condition for digital currencies to thrive. Therefore, we should expect to see more cryptocurrencies in the future and these are the main reasons why I invested in them in the first place.
However, at the current pace that cryptocurrencies are growing we ought to be cautious because it is now the biggest bubble of all time. For a currency to work one should be able easily use it for exchange of goods. Are you going to accept Bitcoin as payment if you know that it can either gain or lose 20% of its value in less than a day? Even if you use the logic that on the long-term it has only been increasing since its initial creation in 2009 and you accept the payment in Bitcoin. Are you going to buy something else with that Bitcoin or are you going to save it so that it keeps increasing? Bitcoin(and cryptocurrencies in general) is the biggest bubble in history as the chart below from MarketWatch shows. This is a fact that we can no longer ignore. And like all bubbles, this one too is going to burst. And it could be a hard crash because unlike the tech stocks (DotCom bubble) which crashed in 2000-2002, Bitcoin has no intrinsic value. Stocks like Microsoft and Apple crashed too in 2000 but they survived the fall because they had an intrinsic value and intelligent investors bought them for their value and not for their price. With Bitcoin, the price is 15000 USD but the value is 0 USD. Most people are buying Bitcoin because they are expecting it to grow more. Bitcoin's independence from an authority is what makes it special but it is also what makes it worthless. I don't think that the bubble has burst yet, it is likely that Bitcoin is going to grow more in 2018 but we should be asking ourselves one questions, what will happen when the cryptocurrency market cap surpasses the US GDP? (or the world GDP?) At a rate of 2000% a year, that is not impossible. But unlike the US economy which is the locomotive of the world economy, cryptocurrencies are just codes stored on a network of computers.
Preparing for the imminent crash, I have decided to start taking my profits on my Bitcoin and Ethereum investments. I am going to do that gradually because it is impossible to predict when it will crash, it can be tomorrow or in ten years. But it will crash. Does that mean that cryptocurrencies are not the money of the future? Not at all. I still believe that cryptocurrencies will have an important role to play in our lives in the coming decades but not at its current form. Remember that Bitcoin was the first to be created and has since known competition from other cryptocurrencies which are more efficient. We are certainly going to have even more efficient cryptocurrencies in the future. It will be very speculative to say how they are going to be and whether they will be regulated by governments or private banks. But for the time being, "Bitcoin is total insanity," like Charlie Munger said, "and should be avoided like the Plague."