Is there a method behind the Bitcoin madness?
Which is the asset that has returned 55% in the last 1 month, 111% in the last 3 months, 335% in the last 6 months and 1,260% in the last 1 year? Hold your breath, over the last 5 years the return on this asset is 79,500%. The answer to the question is Bitcoin.
A bubble is not a bubble
The rapid appreciation in the price of Bitcoin has obviously drawn parallels with previous such bubbles like the South Sea Bubble and the Tulip Mania. Both these past bubbles were based on an asset that did not have any intrinsic value but continued to rise in price. Bubbles are dangerous because you are not sure when it will burst. Historically, all bubbles have left a trail of destruction when they unraveled. The kind of returns given by Bitcoin is absolutely stupendous. What is ironic is that just a year ago, most experts were writing off Bitcoin as a cryptocurrency experiment gone wrong. There are 3 things to remember in the bubble story. Unlike the South Sea Bubble and the Tulip Mania, the Bitcoin has been moving up the middle of acute doubt and cynicism. That is one of the reasons the rally has continued. Secondly, Bitcoin does offer the benefits of a non-fiat currency like gold without the related hassles of gold. Lastly, Bitcoin is still a peripheral currency and global central banking regulation is yet to come to terms with Bitcoins. Till it is regulated, it could continue to stay buoyant!
Bitcoin as currency
Over that last 10 years since the sub-prime crisis unraveled in the US and the rest of the world, there has been the aggressive infusion of liquidity by central banks. That was possible because there was no restriction on note printing by central banks. Since regular currencies are fiat currencies, it just requires a fiat to print more currency. That is the problem. Currencies get substantially debased but these currencies do not depreciate as they have an exorbitant privilege. Since currencies like Dollar and Euro are trading benchmarks, they will be in demand even if they get debased. That is not possible in Bitcoins as the supply can be limited by the network. Thus it plays the same role that gold played in the old days!
Actually a vote for Blockchain
What many investors are seeing as a vote for Bitcoin could actually be a vote for the future of Blockchain technology. The Bitcoin is based on Blockchain technology, which is a decentralized and shared database approach. Not just for currencies, Blockchain has huge applications in digital identity, data protection, data sharing, shared output, de-risking global operations etc. Blockchain is likely to revolutionalize business in the next 5-10 years and Bitcoin may just be seen as an eloquent representation of the Blockchain potential. Now sample that! ©