The recent price escalation that Bitcoin and other cryptocurrencies are seeing has many traders nervous. Far from confirming the solidity of an alternative currency and/or investment that still has much to prove, this unstoppable meteoric rise only opens questions and sow doubts, rather than clear them.
After all, Bitcoin is not only a crypto-currency, but also an asset, which is why it is susceptible to bubbles and landslides, just like any other asset in the market. And what interests us more in the face of today’s article: it is possible to do a serious market analysis on Bitcoin as an asset?
Is Bitcoin an asset?
I will begin by pointing out that I am aware that some will be somewhat perplexed at the fact that I catalog Bitcoin as an asset, as opposed to being a currency by its very nature. Let me state my opinion clearly: Bitcoin, as an element that is traded in different markets, and especially as an element of value that some investors use to keep in portfolio, is after all an asset. Let us therefore start from this premise, regardless of the type of asset in which it can be cataloged based on its reliability or its inherent risk profile.
The moment to speak of a bubble in Bitcoin had to arrive someday
The current moment seems appropriate to analyze this issue for various factors, but especially since Bitcoin has experienced a meteoric rise over the past few months. We haveÂ written before about Bitcoin.
It’s true that we were then talking about the character of refuge value that Bitcoin is acquiring, basically because of its behavior in times of crisis or shocks at the world level, but this does not make it safe from suffering bubbles, just as has happened to gold throughout history.
What has changed since so that we now think that Bitcoin may be experiencing a bubble? As a refuge, little value: international investors continue to make use of crypto-currency in this sense, and that is what ultimately gives it it character as a refuge. What has changed (among other things) is a revaluation of more than 50% in just a few weeks. You will agree that if we were seeing this evolution in so little time in the price of Brent’s barrel, in the stock exchanges, or in gold, we would undoubtedly be talking about the formation of a possible bubble: I do not see why Bitcoin is going to be an exception.
Apart from Bitcoin’s stock price, what other factors point to the formation of a bubble?
I will start this section by pointing out a factor that does not necessarily have to be indicative of a bubble, but that certainly has been able to contribute decisively to its formation. I am talking about the strong concentration of most of Bitcoins among so few investors.
I have already told you about this subject in the past, more specifically in the analysis that I have linked to you before. If there are a few Bitcoiners who own almost all Bitcoins, and they may not be willing to sell (in fact they have not done so in the last few years), obviously there may be a bottleneck supply, given a growing demand.
There are three classic factors indicative of the formation of a bubble in any asset:
- The PE (Price-Earnings Ratio)
- The pace of mergers and acquisitions
- Â Demand for alternative secondary assets.
Regarding the first of the factors, the PER, we must say that it can not be measured as such in the case of Bitcoin. This is not a technical impossibility or anything of the kind, but is due to the very nature of Bitcoin as a crypto-currency, and in contrast to the actions of a company that brings tangible benefits aside from listing in the markets.
But this is not an anomaly of Bitcoin, we can say the same with regard to gold, oil, any raw material in general. However, the fact that a Bitcoin does not produce more return than the one due to its mere stock priceÂ is notable.
With regard to the M&A activity as a factor, in this case we can not apply this indicator in a conclusive way since, in the case of coins with differentiated encryptions and not being a publicly traded company, there is no option to carry out transactions Merger or acquisition. However, this factor can give us some extra insight, since the number of crypto-currencies quoted is stratospheric: CoinMarketCap quotes more than 800 of them.
This is a crypto-currency price that seems excessive for the current size of the market, and is also propped upÂ by future expectations yet to be confirmed.
Stay tuned for part 2Â for the resto of this analysis…