Is Bitcoin A New Asset Class Or The Next Great Market Bubble?

By now, you’re probably sick and tired of hearing about the price appreciation of bitcoin. Especially if the friends or family who told you to invest earlier were bragging about profits over Thanksgiving dinner.

Whether or not you’re invested or want to invest, the price history of the cryptocurrency is mind-boggling when taking into consideration that it may have no real value at all. Not to rub salt in the wound for those of you on the sidelines, but this tweet, which is where the inspiration for this article came from, shows the crazy and rapid rise in bitcoin this week.

Bitcoin Supply And Demand

Let’s start with the fundamental reasons why bitcoin has skyrocketed.

Even if one has never taken an economics class, the supply and demand dynamics are easy to understand. New bitcoins come into the world via a complex mathematical and computing process. At this time, only 21 million bitcoins are to be mined, or distributed, by 2140. Every few years, the amount to be mined is cut in half. That total includes 4-6 million that have been lost.

“Money follows money and this is creating this new digital asset class for investors which we have not seen in our lifetime,” bitcoin investor Michael Graub told Benzinga.

If this is indeed true, then with only a limited supply, bitcoin’s rapid price appreciation is not out of the ordinary, especially if there is truly institutional money on the sidelines that wants or needs to add bitcoin to their portfolio.

“The value proposition of the individual taking money out of the legacy banking system and putting it into this new digital asset class enables P2P transactions,” Graub said. “This takes out the friction or the middleman in the transaction such as PayPal or Venmo. This is truly evolutionary in our time.”

Another fundamental reason for the price increase in bitcoin lies in the fact that it’s predicated on a “buy only” structure. In other words, up to this point — and this will change soon — it’s very difficult if not impossible to short bitcoin. The only sellers are previous buyers with no one in the mix to speculate on the downside. Under that kind of market structure, there’s nowhere for the price to go but up.

‘When The World Has Opinions, We Use Technicals’

The ability to short and for institutions to participate (both long and short) on a regulated exchange will commence Dec. 10, when the CBOE begins trading bitcoin futures and the Chicago Mercantile Exchange on Dec. 19. NASDAQ/Cantor Fitzgerald will launch a bitcoin product in 2018.

Keep in mind, this move by the CFTC may prompt the SEC to allow a BTC ETF along with options, which would bring more buyers and sellers onto the landscape.

Such a move by the SEC would create a new spectrum for arbitrage activity between the exchanges and cash markets

From a technical perspective, T3 Live Chief Strategic Officer Scott Redler sums it up better than anyone: “When the world has opinions, we use technicals. Bitcoin, since breaking out above $1,750, has moved like a high beta momentum stock. It rose above the 8/21 day moving averages all the way and only tested and held the 50-day moving average twice.”

Redler goes on to say: “So lots of ways to technically approach it versus using opinions. Lucky traders couldn’t short it — they would have been taken out on stretchers. Just like Amazon from $100 to $1,213.”

Until the trend is broken, the path of least resistance for bitcoin is up.

PreMarket Prep Tackles Bitcoin Dec. 19

Since Tulipmania mesmerized the citizens of Holland in the 1630s, there have been four other major market bubbles:

South Sea in the early 1700’s;
Japan’s real estate and stock markets in 1986;
Dot Com Bubble in 2000; and
U.S. housing bubble in 2006.

What distinguishes the potential bubble in bitcoin is that it’s a worldwide phenomenon in which anyone with access to a computer can participate. This makes the potential fallout even more devastating.

Now that viable mechanisms to short bitcoin are beginning to trade, the actual value of bitcoin will be eventually be discovered. It will be determined whether a new asset class has been created, or whether bitcoin is simply what software developer and Nanex CEO Eric Scott Hunsader calls the “iTulips” of the 21st century.

From 8-9 a.m. Dec. 19, Benzinga's PreMarket Prep Show will devote its entire broadcast to the fascinating new topic of cryptocurrency. Early investors will be represented as well as staunch bitcoin critics. After all, there is truly no fundamental way to accurately assess its true value. The podcast will include background information and the upcoming changes in the marketplace that will have a long-term impact on bitcoin’s true value.

Disclosure: The author is long bitcoin.