I do not get Bitcoin (and, by extension, all other crypto “assets”). Are crypto assets a currency, a true store of value, or just some speculative trade in a commodity?
Things that make no sense (I just may be naïve and uninformed):
- Bitcoin’s invention is attributed to a mysterious individual or group using the pseudonym Satoshi Nakamoto. So, this “thing” mysteriously appears.
- It is claimed that a limit of 21,000,000 bitcoins can ultimately be mined. How do we know this? How can it be proven? Is this based on the word of someone/something that we do not have an identity on? Has there been independent and authoritative confirmation? Can the algorithm/source code be changed?
- What happens if Satoshi Nakamoto decides to make some more? What would prevent him/them from doing that?
- Bitcoin is still pegged to the dollar—it is not independent of it. While some business people may accept Bitcoin, the calculation is still based on its value with respect to the dollar (or any other national currency). The cost of an item in Bitcoin will not stay static as its value vs. the dollar (or other currency) fluctuates.
- The only winners seem to be the speculators who hit the “upswings” and nefarious actors who like the anonymity of transactions of, let’s say ill intent.
The chart below is from Google Finance and shows Bitcoin’s price over the last 8 years. If you got in at the troughs, you generally did well—hence the crypto-millionaires that were created. However, if you got in at the peaks, well, that is a different story, especially if you could not stomach the ride down and sold out before the upturns.
This recalls some old and more recent speculative investments.
“Tulipomania occurred in Holland during the Dutch Golden Age… Speculation drove the value of tulip bulbs to extremes…There was a frantic tulip trade where people did pay incredibly high prices for some bulbs, and the price of bulbs did collapse. At the same time, there were many people who were not involved in the speculation and total national trade didn’t collapse[1].”
Or the pandemic-induced frenzy “memes” that caused AMC Entertainment Holdings and Game Stop stocks to soar and then collapse. On January 8, 2021, AMC stock was $8.33 per share. A mere six months later (June 18th), it traded at $233.68, more than 25 times what it was in January. It was $105.88 by the end of 2021. It now trades at about $4 per share.
GameStop traded at $4.71 on December 31, 2020. One month later, on January 29, 2021, it was $81.25. It then traded between $40 and $60 for most of 2021, $20 to $40 for most of 2022, and $15 to $25 for most of 2023. Recently, GameStop has been trading in the $10 to $15 range. UPDATE: On Friday, May 10th, GameStop traded at about $17.25. It shot up to $36 or so on Monday, May 13, $64 on Tuesday May 14th (yes $64!) and then went back down to $39.55 at the end of the day Wednesday May 15th. Crazy movements that seem to be something called short squeezing. A short squeeze happens when the price of an stock rises sharply, causing short traders to close their positions. It begins when the price of a stock unexpectedly jumps higher.
Also, the NFT craze of 2021, where bored individuals on the computer spent a lot of money on these items. Since then, many have lost significant value:
- The Bored Ape collection is down about 90%.
- Jack Dorsey’s 1st tweet sold for about $2.9 million in 2021 and is now represented as being valued at about $2,000.
Hey, how about Cabbage Patch Kids and Beanie Babies (from the 80’s and 90’s) and more recently Coleman mugs and Trader Joe grocery bags?
Some say Bitcoin is different because there is a limit of 21,000,000 and something called half-life, which is supposedly in the source code and limits supply (by making it harder to mine the remaining 21,000,000 as more Bitcoin are mined) and more scarce. No one really knows when that will occur (the estimate is May 2024 for the next half-life transition). The trend has been every 4 years or so. Limited supply and high demand equate to higher prices. Recent approvals of ETFs have substantially increased demand, hence the recent upswing in Bitcoin’s price. But I still do not get where the underlying value is.
I guess time will tell. I may be losing out on a lot. However, how can I make a rational decision if I do not understand the product?
[1] Source: Library of Congress https://tinyurl.com/43dhe8c7