Well, it has been a fun party. Here is a chart of Bitcoin prices over the last year or so. Folks that bought in before December were up X4 or more by April. Woo-hoo! But prices have dropped by half in the past two months. Many articles were published over the winter justifying ever greater heights for Bitcoin. It was to be the digital equivalent of gold as a store of value. Also, it is touted as being decentralized and free of government manipulation – – a global, privatized people’s currency. What happened?
Over the past year, some really big institutional buyers like Tesla and MicroStrategy bought billions of dollars of Bitcoin, holding them on their balance sheets as cash-like assets. That in turn led to more institutions buying or at least talking about buying. Unlike almost any other digital currency, the total supply of Bitcoin is a fixed amount, so you don’t need to worry about dilution. Also, the Bitcoin operational protocol is battle-tested, having been going for over a decade.
Bitcoin transactional procedures are skewed towards being ultra-secure, at the cost of being inefficient. We have previously described its blockchain operation, and the cryptographic hashing that lies behind that. However, that secure, computational-intensive operation has caused Bitcoin to come under fire lately. It is widely cited that total Bitcoin “mining” consumes as much electricity as the entire nation of Argentina. Bitcoin proponents counter by claiming that most of the electricity used for Bitcoin is renewable or is power that cannot profitably be exported to the rest of the grid.
Elon Musk’s tweets have an enormous impact on cryptocurrencies. Much of the rise of Bitcoin in December-January has been attributed to just a couple of his pro-Bitcoin aphorisms. But in the past month or two he has started tweeting against Bitcoin, citing its power consumption. (Perhaps he wants the electrons available instead for running Teslas). His tweets have cut into the cool factor for Bitcoin. It may also be that all the 20-30 somethings who were bored at home during Covid and trading crypto with their stimulus checks are now getting out more.
It may also be that this is simply a bubble which has run its course. The arguments for the uses of Bitcoin for short-term transactions may all still be valid, but the long-term “store of value” factor is like gold or tulip bulbs – it all depends on what some “greater fool” will pay you in the future for some asset which (unlike rentable real estate or profitable company, which can generate an ongoing cash stream) has almost no intrinsic value. Here is a chart of Bitcoin over the past five years, on a logarithmic scale. The price (actually total return, which includes dividends) of the S&P500 stocks is shown for comparison:
This shows that Bitcoin has gone through repeated long-term peaks and troughs. The long-long-term trend has been upward, which is what die-hard Bitcoin “HODLers” count on. What may be different this time is the plethora of alternative cryptocurrencies, and the concern around consuming that much power, and thus generating that much CO2. For just plain transactions, there are other cryptos which do the job much faster and cheaper.
Where do we go from here? Nobody knows. I got into Bitcoin at close to today’s levels late last year, and felt the rush as it went up and up. But with the decline and fall, lately I have trimmed down my holdings to just a toehold. So I will not be the next Bitcoin billionaire. If it goes up, I will smile, but if it goes to zero, I will not cry.