In November 2013 Bitcoin surged to over $1000 in value. Early adopters watched as their investment grew by orders of magnitude. Media outlets and economists now cast the spotlight of attention on this mysterious cryptocurrency. Many started asking the question “Can I make a fortune with Bitcoin?” As the value of Bitcoin has dwindled to $260 many of these bandwagon Bitcoin supporters have lost interest. Yet, there are those of us who still see potential in Bitcoin. Will Bitcoin remain a shadow of its former self or are we on the cusp of something great?
Predicting the future is difficult. Investors and day traders have a clear financial incentive to accurately predict the value of stocks and markets, so we can assume their techniques provide a reasonable amount of success. When deciding to invest, there are two commonly used techniques; fundamental and technical analysis. Fundamental analysis evaluates a market’s intrinsic value while technical analysis monitors price fluctuations and market activity.
Using Fundamental analysis, we will determine the intrinsic value of Bitcoin and evaluate whether it is currently undervalued. If it is, that would support the claim that investment in Bitcoin will yield profit when the market value reaches equilibrium with its intrinsic value. How does one determine the intrinsic value of Bitcoin? This measurement is relative to individual preference and confidence in the blockchain technology so arriving at an exact number is impossible. Instead, let’s evaluate how effectively Bitcoin performs its functions. Specifically, how effective is Bitcoin as a store of value? The Bitcoin volatility index reports how much the value of Bitcoin has fluctuated at different periods of time. For the past six months, the volatility of Bitcoin has remained below the 4% level. We have determined that for the past six months, Bitcoin has been a stable and effective store of value. Only individual thresholds of investment risk can determine the nominal value of this characteristic of Bitcoin. However, we can compare Bitcoin with other investment strategies that purport to safely store wealth. Let’s examine the US Dollar as a store of value.
Inflation is an expansion of the money supply. The effect of inflation is a reduction in purchasing power as the supply of money goes up and the amount of resources stays the same. Since the Global Financial Crisis in 2008, the US Federal Reserve has inflated the US money supply with an additional 3.5 Trillion dollars of bailout money to big banks and the automotive industry. The reduction of purchasing power is a delayed process where those who receive the newly printed money spend it before the effects of inflation have time to increase the nominal price of goods and services. Those at the bottom of this economic food chain (middle and lower class) suffer as their wages are slower to increase than the price of the goods they consume. Since 2008, the inflation of the US Dollar has resulted in a significant reduction of purchasing power and thereby failed to function as an effective store of value. Over the same time period (since 2009), Bitcoin investment has grown by four orders of magnitude; from $0.02 to $200.
Where did all that money go anyway? Most of that bailout money has fueled speculative investment into the US stock markets. Check out the NASDAQ, DOW, and S&P 500 with timeline settings set to Max.
All three of these indices are valued at more than double their peaks during the well-known stock bubbles of 2000 and 2008. Am I suggesting that the stock markets are in a bubble? I certainly am. What happens when this bubble starts to pop? The Federal Reserve has made it abundantly clear that they are the buyer of last resort when the economy starts to collapse. I anticipate a stock market bust that causes the Federal Reserve to print even more money to keep the bubble going a little longer. Such an action would jeopardize the confidence of the US dollar as the world’s reserve currency. If this happens, foreign countries will not need to hold US dollars in their reserves for trade reasons and readily send all their US dollars back to America. Hyperinflation will ensue as the Fed prints to infinity and foreign countries send back their dollar reserves. Any wealth still stored in US Dollars will be dissolved.
As these values fluctuate at this primary stage, Bitcoin poses a great future if invested early. One of the resources to try is self-minting to obtain the cash without any fiat currency exchanges. Minting enthusiasts can start with affordable hardware installations from universal suppliers like CoinMiningDirect, who are largely found reliable. They can refer to Coin Mining Direct Reddit reviews to select the best suitable for their experience and talent.
While we cannot assign a nominal price to Bitcoin as a store of value, we can compare it to existing stores of value and evaluate for ourselves what worth we will assign to this inflation resilient technology. I always loved this 90’s MasterCard commercial. Here’s my own version.
Quantitative Easing 1 – 1.3 Trillion Dollars
Quantitative Easing 2 – 600 Billion Dollars
Quantitative Easing 3 – 1.4 Trillion Dollars
Bitcoin – Priceless