Dec. 5, 2017
Bitcoin is a mania that sooner or later will come to an end, the way every mania ends: falling demand in the face of rising supply. And when that happens, Bitcoin prices could be driven back to $1000.
That’s according to some estimates which set the fundamental value of Bitcoin at $1,142.
Still, it may take quite some time for this to happen.
“We have known for a long time that rationality of behavior and expectations is not enough to prevent bubbles, as it is not enough to guarantee that the price of an asset is equal to its fundamental value,” says Christos Giannikos, Professor of Finance at Baruch College.
But the Bitcoin crowd expects demand to soar, as the digital currency gains a growing acceptance as a medium of transactions, and a speculative “asset.”
So what could cool demand for the digital currency?
There are a couple of things that could kill the hype for the digital currency and help push demand in the opposite direction. One of them is a Lehman or Enron-style fraud event, not necessarily in the Bitcoin market, but in some other cryptocurrency market, which brings to mind the wild west mentality of mid-19th century capitalism.
A major cryptocurrency fraud event could depress demand for Bitcoin in two ways.
One of these is a “run on the bank,” style panic as fear replaces greed. That would provide the very much needed excuse for big governments and big banks to tame the growth of the “people’s currency.”
The second thing would be the end of easy money. That would push interest rates higher, and take the “air” out of the Bitcoin bubble that has turned into mania.
In that light, it should be noted that the 10yr US Treasury yields have already edged closer to 2.50%, almost a point higher than a year earlier.
Higher interest rates could put pressure on Bitcoin demand in a couple of ways. One of them is that higher interest rates raise the “opportunity cost,” of money used to buy Bitcoins. That’s especially the case for investors who buy Bitcoins on “margin,” with borrowed money, and are expected to face “margin calls” should the digital currency drops precipitously.
Another reason higher interest rates could put pressure on Bitcoin prices is that they would restore “credibility” to central banks and to national currencies they control. That would make alternative currencies like Bitcoin less appealing to the general public.
While fraud and the end of money could depress Bitcoin demand, blockchain, the technology that created Bitcoin, can be used to create other cryptocurrencies that compete against Bitcoin, as already it has done.
Like Ethereum, Litecoin, and Ripple, to mention but a few.
That would be the bad news for Bitcoin investors. A larger supply of cryptocurrencies combined with a falling demand could eventually crush Bitcoin prices for good.
That’s what happened to tulip prices back in the 17th century.