Since the last time I wrote about crypto currencies, bitcoin has gone up by more than 300% within a span of a few months. This is the kind of returns people can only dream of with traditional assets. As a result, a few bitcoin millionaires were born and many of them are not even in their 30s yet. Is it luck or is it guts? That these people were able to become millionaires almost overnight? I would think it is a combination of both. But then a question came to my mind, why do we call these people millionaires ? I mean they barely hold a few hundred bitcoins right?
We call them millionaires because the assets they hold are worth millions in traditional currencies. Similar to gold, it is difficult to go out there and use a bitcoin to buy goods. While this may change in the future, I don’t foresee it happening anytime soon. So what are somebody reasons people are buying cryptos?
To cash out to traditional currencies
Let’s be realistic, a large portion of people holding bitcoin are just speculating and waiting for a big fat paycheck in traditional currency one day. How can bitcoin replace our paper currencies if the majority of people holding onto it doesn’t want paper currencies to be replaced in the first place? So what happens if the USD becomes worthless? Then so called bitcoin millionaires would no longer be called millionaires would they?
Value Value Value
Price is what you paid, value is what you get. If bitcoin is worth $10,000 USD, it means you should le to extract value equivalent to $10,000 USD. What can $10,000 USD get you? It provides food for 1 year, assuming $10 per meal. It pays for rent for at least half a year. You can buy 650 hours or close to 1 month of another persons life, assuming miminum wage is at $15/hour. Is a bitcoin really worth that much? I understand I’m totally ignoring the potential future value of bitcoins. But it also goes to show that a large portion of bitcoin’s value is supported by its future value. While the future value could be very high, but so is the uncertainty that comes with it.
Bubble or no bubble ?
Right now, I would estimate that at least 30% – 50% of bitcoins’ price to be supported by aggressive media hype. There was actually a guy holding a signboard telling people to buy bitcoin at some random event. Every other person that made some money off bitcoins would be telling their friends, neighbors and dogs about bitcoin. Therefore, I think any negative news could easily lead to a fire sale by speculators.
I shall avoid sitting on the fence and state outright that I feel bitcoin is in a bubble. It will not burst, but it will likely undergo a major correction in the near future. I will be looking to sell and take some profit.
Any views stated here are my personal opinions, I may not be aware of all information out there. Please do your own due dilligence thanks.