Bitcoin Price: It's Outperforming Every Currency and Market — But is It Just a Bubble?


2013 has, thus far, been fiscally prosperous, marked by the S&P and Dow reaching all-time highs multiple times. Some financial pundits warn that such gains are “artificially induced highs," and investors should stay away; however, that said, the average investor is not privy to such analysis and thus, these highs have infused many Americans with confidence in markets, which in turn leads to less risk aversion.

In this pattern, a new currency, or market, has capitalized on the high-performing msrket, emerging as the hot ticket item. That currency is bitcoin. Bitcoin is one of the first implementations of a concept called crypto-currency and is designed around the idea of a new form of money that uses cryptography to control its creation and transactions, rather than relying on central authorities.

The first bitcoin transaction took place on January 12, 2009 and the first listed exchange rate for bitcoin (BTC) was $1 = 1,309.03 BTC.

According to Mt. Gox (the largest, most established bitcoin exchange), as of Tuesday, April 10, the last exchange rate was $233.37950 = 1 BTC. That means since 2009, BTC is up 30,549,977%. Furthermore, since January 1, 2012, BTC is up 4,844%; and since January 1, 2013, BTC is up 1,656%.

So, the question that evidently follows is, is it sustainable? How long can this last? Is there a bitcoin bubble and if so, when will it break?

People have been talking about the impending bursting of the bitcoin bubble for over two years, but it has yet to come. That certainly does not mean one will not come, but does speak to bitcoin’s thus far unruly ability to endure. Conversely, a burst is likely to be imminent. Bitcoin will subsequently recover, at least to some extent.

As this chart below shows, bitcoin did not start gaining mainstream exposure until mid-2012, and in 2013 has seen exponential growth regarding its exposure. Regardless of the entity (whether a product, service, currency, or other), saturation often follows exposure or growth that happens too fast; such growth is arguably happening with bitcoin currently. This is also an impending problem for bitcoin since it is backed by nothing, thus its only value comes from market demand.

The astronomical value of bitcoin is being artificially generated by its ever-growing exposure, and thus demand; however, eventually, whether sooner or later, bitcoin will saturate the market, and demand for it will substantially take a hit — which will lead to the bubble bursting, at least temporarily.

This being said, the bubble bursting will lead to the end of bitcoin, in a substantial sense, because of the long-term insight integrated into the currency.

The bitcoin currency is limited to 21 million bitcoins, which have been being released over time. Since continued release, and thus continued supply, of bitcoins has and will continue in the short term, demand will abate, especially once the market is saturated. But when the ceiling of supply is released, bitcoin's past exposure and popularity can be used to regenerate interest and demand based on the notion that it is now limited.

It is a common marketing principle that people desire what they, or others, cannot have. Thus, once the supply of bitcoin is discontinued, a realization that others have what you cannot will likely re-engender the artificial growth and demand for the currency, thus significantly increasing its value.

My advice: hold off on buying bitcoin now, seeing as there is no telling when the bubble will burst. An investor could take a substantial loss because of this. Wait for the impending burst, and once you believe it to bottom off, buy then. The eventual cut-off of the supply should lead to quite a profit on your investment.

In full disclosure, I am no expert on currency or economics. This is only my opinion on what shall transpire.