As DataTrek’s Nick Colas, formerly chief market strategist at Convergex Group, writes overnight, “we’re doing our best to make sure we don’t flood you with bitcoin/crypto information because there are plenty of other issues with broad appeal.” However, he finds that hard to do when the topic dominates both financial news headlines and popular imagination… and when it goes from $11,000 to $8,900 in two hours.
To address some of the pent-up confusion, here are the three questions (and answers) Colas it getting most about bitcoin at the moment:
#1 Where is all the new interest coming from (i.e. is it just the US?)
Looking at Google Trends, the top five countries for bitcoin searches over the last 24 hours are: The Netherlands, Australia, South Africa, Singapore, and Switzerland. The US is in 8th place. Searches for “Coinbase” (a popular wallet app) come from Malta, Singapore, the US, Norway and Switzerland (in that order). Within the United States, bitcoin is strictly a bicoastal phenomenon. Google searches come most from New York, California, Hawaii, New Jersey, and Washington. Searches for Coinbase look the same.
The upshot is that bitcoin is a tech-enabled (and therefore global) phenomenon, which is a critical feature of its price advance. We can’t think of another financial asset in history where the majority of the world’s citizens can invest as easily as they view an Instagram picture or chat on Twitter. And on that point, one fun (and perhaps telling) statistic: in the US, Google searches for bitcoin are 6-7x greater than those for “Kim Kardashian”. Enough said…
#2 When will the rally stop/slow down, and what is bitcoin’s “Fundamental” Value?
Our best look at bitcoin’s intrinsic worth is to compare it to the total value of American and European high-denomination bank notes in circulation. Both bitcoin and its fiat currency counterparts are portable stores of wealth, which appeals to buyers/holders of each. Yes, fiats are government backed, but you can’t counterfeit a bitcoin. So we’ll call it a draw in terms of relative attractiveness. There are currently $1.1 trillion in $100 bills in global circulation, and $650 billion in high denomination euro notes. Total value: $1.7 trillion, not counting counterfeit notes that likely add 20-30% (in the case of $100 bills at least).
By comparison, bitcoin’s current total value is $167 billion, and total crypto currency outstanding is $307 billion.
The question is: what is the appropriate share for crypto currencies like bitcoin in a market defined as “fiat+crypto currencies”? At current levels, bitcoin’s share is 8%, and all cryptos combined have a 15% share.
Where could this ratio go? Here is a table to consider, assuming bitcoin remains 50% of the total crypto currency market (a fairly sticky ratio lately):
- Bitcoin at $20,000: 14% market share of crypto+fiat paper currency market
- Bitcoin at $50,000: 25% market share
- Bitcoin at $100,000: 33% market share
The calculus here comes down to adoption rates, just as it does with any new technology. One advantage for bitcoin in terms of price: incremental supply comes on very slowly, unlike other tech-enabled products like smart phones where manufacturers produce as many units as possible.
Our take: bitcoin remains a highly speculative asset – the spiciest thing we’ve seen in +30 years on Wall Street. We can see pathways where it continues to climb, but even a glance at a historical price chart shows this is a highly volatile situation. More on that in point #3…
#3 VERY IMPORTANT: What will the entrance of futures exchanges and bitcoin contracts do to the price?
Both the CME and CBOE are set to launch bitcoin futures soon, and today the NASDAQ threw its hat in the ring as well. Moving bitcoin into a regulated structure will allow more sorts of investors and traders to speculate on price moves in the currency. That, the thinking goes, should be good for bitcoin prices.
One intriguing point: shorting bitcoin is currently a clunky process, but futures markets will make it much easier. The difficulty of shorting bitcoin has been an underappreciated feature of its meteoric rise, limiting true price discovery. Whether anyone is brave enough to put on a sizable short position remains to be seen. But someone who wants to back up their “Bitcoin is a fraud” talk with dollars will soon have a place to express their viewpoint.
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And a final, and deeply cautionary, point: yesterday’s plunge in bitcoin’s price may have been caused by a DDOS (Direct Denial of Service) attack on several exchanges. That’s the color from some market observers, anyway. The speed and severity of the decline certainly points to a technological glitch.
Put together the ability to short bitcoin easily with what happened today, and you see the problem. The financial incentives to disrupt the bitcoin exchange/wallet ecosystem increase exponentially once futures start to trade. Whether the world’s bitcoin exchanges and wallets are up to that challenge is an important – and unanswered – question.