The first time I wrote about Bitcoin (BTC) — the electronic currency set up to buy and sell illegal drugs and other products through an anonymous public electronic ledger — was in June 2011, a few days after its price dropped from $17.50 to “a few pennies” after its Tokyo-based currency exchanger Mt. Gox was hacked. By February 2014, the last time I wrote about BTC, the price had risen to $556 — valuing the 12.34 million BTC at $6.9 billion.
But these days, you have to pay $17,000 or $16,000 per BTC — making the so-called cryptocurrency worth a mere $268 billion. With the imminent launch of a BTC futures exchange on the CBOE, is there any logic on which to base BTC’s value in dollars?
As someone who wrote a book, Net Profit, about investing in Internet stocks before the dot-com bubble burst, I have thought about whether it is possible for anything real to emerge from speculative bubbles.
And that experience leads me to two theories that can justify setting a price for BTC anywhere between $0 and infinity.
Theory 1. BTC is pure emotion punctuated by periodic theft
In this theory, people buy or sell BTC in a wave of fear. Specifically, they are afraid of missing out on further appreciation in BTC’s price. For those suffering from such fear, there is plenty of evidence to support their belief.
For example, the compound annual growth of BTC between early June 2011’s $17.50 and December 7, 2017 (when many prices including $17,000 were quoted) was 182.5%. Since the beginning of 2017, BTC has risen some 17-fold. And not surprisingly, on December 6, $70 million worth of BTC was stolen.
With such price increases, more and more people are concluding that the biggest risk is not to invest in BTC. What would be helpful now is to be able to see real-time fund flows for each BTC transaction to see how much of the money flowing into BTC now is from institutional investors and individuals as well as who is selling.
Of course, buying BTC can be easier than selling it when its value plunges. That’s because most institutions accept dollars, not BTC, to conduct business. Therefore, the viability of BTC exchanges is crucial.
So when BTC exchanges are hacked — which seems to happen with alarming frequency — the fear of missing out on further appreciation is replaced with fear of losing investors’ BTC funds.
Crowding at the exits can be bad for those investors — especially since BTC exchanges are unregulated, are operated by individuals who may or may not be particularly ethical, with an uncertain amount of liquid funds available in the event of a BTC redemption panic.
The dot-com bubble certainly featured such parabolic swings between greed and terror. Just consider what happened to the price of a share of analytics software maker MicroStrategy — between April 1999 and February 2000, its stock rose from $86 to $1,387 — a compound annual rate of 1,891%. By May 2000, MicroStrategy stock had lost 86% of that amount — tumbling to $190 — which is considerably above its current value of $134.
Of course, unlike BTC, MicroStrategy is a real company with over $500 million in sales and $108 million in free cash flow.
Theory 2. BTC will make the world run more efficiently
Imagine a spectrum of publicly-traded companies. On one end are companies like Ford that make physical objects that generate real revenue and on the other extreme you have companies that have no revenue and a good chance of never getting any.
In the latter category, you have many publicly-traded biotechnology companies — which are bets on the ability of scientists and others to turn tiny molecules into drugs that people will buy to cure their illnesses. Along that path there are many risks that could derail the quest — but investors are happy to assign in some cases billions of dollars in value to these firms’ shares because of the chance that they will succeed.