Why Traditional Investors Tend to Think That Bitcoin Is a Bubble

We live in crazy times, don’t we?

Bitcoin, a digital currency, founded in 2009 — and which, as the name suggests, is an electronic currency and cannot be held in a physical wallet — is just about the most valuable “currency” in the world and it has been so for a few years now. Given the circumstances, it’s only normal to question the credibility of Bitcoin. Because who, in the real world, actually believes that an electronic currency, created just about seven years ago, is truly worth more than a fiat currency. Say the British pound, that has been through several economic cycles over several centuries and is still here, right?

Considering that the one British pound can only buy you 0.00032 BTC, it’s 100 percent okay for traditional investors, most of whose investments are valued in the British pound, US dollar and other fiat currencies, to think Bitcoin is a bubble. But the age of Bitcoin — that is, how long it’s been around — is the least of the reasons for that. Here’re some really popular ones.

The financial crisis

In the last two decades, we’ve witnessed two bubble busts. The dotcom bubble of the late 1990s and the housing bubble that led to the 2008 global financial crisis. For those who were affected by these two bubble busts, it was two wealth-eroding events in less than a decade. A natural response to such an unpleasant experience is defensiveness. After all, once bitten twice shy.

When comparing the assets that led to the dotcom and housing bubbles to Bitcoin, the odds are ridiculously against Bitcoin, at least, in the minds of traditional investors. That’s because, for the dotcom bubble, there were actual Internet companies that were, purportedly, building or selling products and services that people actually use. For instance, Pets.com, quite the most familiar flop from the dotcom bubble, was selling pet food and supplies, which people actually buy.

In addition, the housing bubble involved real estate, which is quite essential to human existence. In essence, the dotcom and housing bubbles involved assets that the average person could relate without too much education. These attributes don’t exist with Bitcoin. It’s unlikely that it will ever replace fiat currencies, at least if you ask Olaf Carlson-Wee, Coinbase’s first employee and the founder of crypto hedge fund Polychain Capital. “It was a big mistake that any of this was ever compared to currency,” he recently told. Given this superficial, but pessimistic comment from an industry insider, traditional investors are much less likely to see the value in Bitcoin. And when you can’t see value in an asset that’s increasing in price, there’s a bubble.

The security of Bitcoin

There are actually people who think that digital currencies are here to stay, but are worried about the security of Bitcoin. The “Wolf of Wall Street” Jordan Belfort is one of them. Belfort believes Bitcoin is a fraud and claims he knows people “who have lost all their money” to hackers.
Bitcoin followers would remember that hackers have targeted Bitcoin heavily. As a reminder, Mt. Gox, a now-defunct Bitcoin exchange, which was processing about 80 percent of all Bitcoin-to-currency transactions at a time, first suffered a multimillion-dollar theft in 2011. By the time it would stop operations in 2014, roughly $500 mln couldn’t be accounted for. Hong Kong-based Bitfinex exchange also suffered the theft of 120,000 Bitcoins last year. At the time the stolen sum was worth roughly $72 mln. At current prices, that’s over $500 mln worth of Bitcoin. That’s a potential $428 mln investment gain robbed off investors.

Belfort also believes that a digital currency that will take hold will be one created by a central bank.

Demand and supply insecurity

Two of the most publicized value advantages of Bitcoin over fiat currencies are its limited supply and its decentralized nature. But that has created another problem, which has contributed to the volatility of the digital currency. The cryptocurrency was created in such way, that the total number can never exceed roughly 21 mln Bitcoins. And since there can be no direct governmental influence to stimulate value or devalue, it is up to demand and supply spectrum.

Since traditional investors are used to penny stock pump and dump schemes, it’s easy to liken Bitcoin to it, in that, a group of wealthy traders could push up the price of Bitcoin by buying a lot of if — thereby stimulating demand — and then sell the digital currency at a high price, which pushes down the demand, and hence, the price. And there is no central figure to check such activities.

Regulatory uncertainties

JPMorgan CEO Jamie Dimon made news earlier in September for calling Bitcoin a fraud at an investor conference in New York. He said he’d fire an employee for trading Bitcoin because “it’s against JP Morgan’s rules and they’re stupid.” He also pointed out that governments can crack down on Bitcoin if something goes wrong and someone gets killed, citing the recent Bitcoin crackdown by the Chinese government as an example of how governments will always be interested in taking charge of money supply. If that happens, and traditional investors fear it will, the value of Bitcoin will take a hit as it happened briefly when the Chinese government took actions against Bitcoin.

The ease of creating digital currency

As of the time of writing, there are 1,142 cryptocurrencies, and the list keeps growing. There seems to be no barrier to entry. Bitcoin’s share of the digital currency market keeps dropping. Bitcoin now owns about 48.9 percent of the digital currency market, down from nearly 90 percent in 2013.

Going by the logic of stock investing, the higher the market share of a company in its industry, the more value it potentially has. Conversely, a declining market share, that’s not associated with declining prices, is a bubble. The wider the digital currency market grows, the lesser Bitcoin’s market share will be. This also makes it hard of traditional investors to understand Bitcoin’s valuation.

Needless to say that some of these worries are usually overblown. No, I’m not saying that Bitcoin is rightly valued or wrongly valued right now. The point I’m trying to make is that a bit more education on Bitcoin’s pricing might help alleviate some of these worries. Cointelegraph’s “Bitcoin Price, Explained” page is a good place to start.