Have I Changed My Mind About Bitcoin?

Well, no, why would I? What has changed fundamentally about Bitcoin?

When I wrote a post about cryptocurrencies four months ago, the price of bitcoin was $2,400. Now it’s $11,000, but does it change anything in my thesis? Absolutely not. The risks of the bitcoin are still too high to be considered negligible, and the price of bitcoin is still on a roller-coaster that no one knows when or how it will reach its last stop.

The only thing that might change anything is higher adoption in the market, not in terms of buyers and players, but in terms of institutional adoption—more futures and ETFs are expected to be issued, which might decrease bitcoin’s volatility.

Another thing that has happened in the last four months is the separation of bitcoin from other cryptocurrencies. Then it seemed that bitcoin did not have an absolute advantage over these other currencies other than it’s more well known, but today it seems that bitcoin has really gained momentum and separated itself from other cryptocurrencies.

Bitcoin has definitely entered a new era—more recognized and more institutionalized but still aggressively volatile and doomed for price changes above 20% per day. More importantly, it seems that most bitcoin buyers do not buy it based on anything but its price increases. Bitcoin does not hold any incremental value, but the never-ending will to become instantly rich drives people to invest in an instrument they neither totally understand nor have the ability to absorb losses along the way.

So, bitcoin still has the dynamics of a financial bubble—an asset’s price starts to rise, leading people to buy the asset without understanding its value. Then the price continues to rise, and the more sophisticated traders begin to sell the asset. The price starts to fall, and the rest is history—panic, crash, and a lot of lost wealth.

The difference between bitcoin and other assets that have been overvalued in the past is that bitcoin does not necessarily have a value (as I explained in my previous post); it cannot be considered an asset since no cash flows are expected to be generated from it, but neither can it be considered a currency, as the purchasing power of a bitcoin holder is still completely vague. This makes it even harder to project its future and impossible for people who are looking for value investing to invest in it.

Prices can still continue to skyrocket, but my rationale for an investment still differs from the rationale that makes bitcoin a wise investment (if there is a rationale). I would advise the buyers to proceed with caution, as prices don’t go up forever.

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