Bitcoin flirts with the $50,000 level after only four months ago was trading at $10,000. The staggering rise came as a result of increased adoption among institutional investors and public companies.
Bitcoin’s adoption is on everyone’s lips, but a lot of confusion does exist. What is the adoption about – the technology or the investment?
One very good question to any Bitcoin fan is what breakthrough did Bitcoin made. What is the technology or application that was adopted in mass, and it disrupted the existing one? The answer is none. Hence, the only adoption one can talk about is the embrace of Bitcoin (and other digital currencies) as a financial asset that competes with other assets for a place in a portfolio.
Is Bitcoin a Bubble?
Bitcoin and other digital currencies are unregulated. It means that there is no financial authority ready to intervene should things go out of hand.
One thing is sure – regulation will come the more the price of Bitcoin rises. Regulators exist to avoid systematic risks. That is, what if Bitcoin becomes big enough so that its next sharp correction will pose systematic risks? If that happens, regulators will step in.
Up until recently, Bitcoin investors were split into two categories – small and large retailers. Large retailers are private persons that got into Bitcoin in its early stages. Small retailers got in along the way, at considerably higher prices. Both categories expect price appreciation and nothing more.
They did get what they wanted. After all, less than twelve months ago, the price of Bitcoin fell below $4,000. Nowadays, it is up more than ten times.
It all changed when public companies announced investments in Bitcoin. Again, in Bitcoin as a financial asset, not in Bitcoin as new, revolutionary technology. A company’s mission is to maximize shareholders’ wealth. One way to achieve that is to manage better the resources or the extra cash the business generates. For this, the treasury departments of public companies are responsible for investing the cash flows into short, medium and long-term investments in such a way to meet the company’s future cash needs and to gain from price appreciation. This is the area where Bitcoin’s adoption increased – and what creates pressure to the upside due to the scarcity of the asset.
Is Bitcoin a bubble? As long as there is a buyer for every seller, the answer to this question is irrelevant. However, when that ceases to be the case, Bitcoin will pose a systematic risk, forcing regulators to intervene. Regulation seems to be just a matter of when, not if – and that would be a game-changer for Bitcoin holders.