Bitcoin or Bit-Bubble

Everything new and different goes through phases. There’s the “start phase”, when no one knows what it is, but a few jump on board and are extremely passionate, determined, and dedicated to make it work. Then there’s the “success phase”, where those early adopters start to see others make money and want to get involved in the success. Lastly, there’s the “everyone gets in phase” as it appears to be a win so everyone wants a piece of the action.

The Bubble is what follows, and whenever there is a bubble, the bubble ends up bursting.  Most lose it all, sometimes a few survive, and an even smaller percentage come back better than ever.  The dot-com bubble between 1997 – 2001 was an era of extreme growth of usage and adaptation of the internet, creating opportunity for internet-based business. Hypergrowth coupled with hyperinflation caused the bubble to burst from 2000-2001 and force companies likes Pets.com out of business, others like Cisco to see rapid declines, and very few like amazon and eBay to actually survive and come back stronger.

Bitcoin, Cryptocurrencies, the Blockchain… at the bubble or still at the beginning?
These are words that are still not common household terminology, easily explained, or understood by many, but are making many millions in today’s market.   Is there still room for growth, and what actually is a bitcoin?

In 2009, Satoshi Nakamoto, a person or group of people using that name, released an open source software where transactions could take place without an intermediary. This was the first decentralized digital currency, perhaps becoming public at just the right time. The housing bubble of 2008-2009 left many with a disdain for their traditional banks and financial institutions.  With the introduction of bitcoin, the “middle man” we have grown to distrust was now gone.  Transactions are now sent directly from user to user with no fees imposed by the middle man.

According to Mark T. Williams, as of 2014, bitcoin has volatility seven times greater than gold, eight times greater than the S&P 500, and 18 times greater than the U.S. dollar. In 2011, the value of a bitcoin went from $.30 to $32. In 2013, there was a spike of $266 followed by a low of $50. In November of 2013, there was a high of $1,242 and in January of 2015, it hit a low of $224. On March 2017, something happened most were not not expecting or anticipating. The price of a bitcoin surpassed the market value of an ounce of gold.  Within 30 days, the value of one bitcoin had fluctuated between $3,612 and $5,734.

When Nakamoto created bitcoin, it was determined there would only ever be 21 million bitcoins in total, with a defined calculation for how frequently they would be released and how the block rewards would be awarded. With this defined system, the creation or “printing” of more bitcoins didn’t fit into the framework. The majority of bitcoins are anticipated to be mined by 2032. This, however, is just an estimate. Just like any commodity, as there is higher demand, the value begins to skyrocket.  This lends many to believe that there is still a large sum of money to be made, and bitcoin isn’t the only cryptocurrency out there.

The Pioneers
In the beginning, there are always those who rush to be the first in a market. They are usually the ones who win it all or lose the biggest.  Who are the cryptocurrency pioneers and are they winning big or have they lost it all?

In 2011, Erik Finman struck a deal with his parents; if he was a millionaire by 18 his parents wouldn’t force him to go to college.  A bet easily made… there is no lemonade stand that has seen that level of success.

As of 2017, Finman acquired 403 bitcoins, and he is now a millionaire.  He started investing in 2011 when it was only $12 per token.  In June 2017, the price went up to $2,700 a coin valuing Finman at $1,088,100, and just a few months later, the value increased to $5,734, making Finman a multimillionaire at $2,310,801. He literally doubled his net worth in 4 months, and the value of a bitcoin is still seeing rapid growth.

He is now a full fledge tech-entrepreneur with businesses and investments in multiple cryptocurrencies. Finman says it wasn’t always the easiest to be taken seriously in the tech space, but now finally being 18 has helped his credibility a lot.

The Winklevoss twins are perhaps most well-known from the The Social Network movie as having started ConnectU or originally HarvardConnection. Seeing a new emerging market, they saw an opportunity to be part of the next big thing.  The decentralization was a key feature that drew their interest.  They first started with leading a first round of $1.5 million in seed funding of BitInstant, a bitcoin payment processor.  While being passive investors in BitInstant, they also launched Winkdex, an index that tracks the price of bitcoin.  In 2015, the brothers received their approval to launch Gemini, an exchange that is targeted to both novice users and professional traders from the New York State Department of Financial Services.  The twins announced that their seats bought on Virgin Galactic were purchased from profits in bitcoin.

Then there is Mr. Smith (not his actual name but he wants to stay anonymous) who has been traveling the world, only flying first class and staying at 5 star hotels. How? He’s been doing it on his $25 million in profit from bitcoin for the past 4 years.  He makes no attempts to conceal his wealth or how he made it. In 2008, he finished college and landed a software engineering job in Silicon Valley. Two years later, he was introduced to bitcoin through a friend.  In October of that year, he was ready to invest, so he purchased just under 20,000 bitcoins with $3,000; the value was $0.15 per bitcoin at the time.  He didn’t have expectations that he would see a big return, and he partially forgot about the investment.  But in 2013, Bitcoin started to get more attention in the media and the value started to increase. Bitcoin hit $350 and he sold 2,000 bitcoins. A few days later it hit $800, and he sold 2,000 more.  Just like that, he had $2.3 million. He quit his job and started to travel. He still has 1,000 bitcoins and plans to hold them until the process reaches $150,000 a bitcoin, a price he is more than confident it will reach.

The Prisoners
BitInstant, founded by Charlie Shrem, came out of Shrem’s frustration with the time it took to buy and sell bitcoins as well as a crash that resulted in his bitcoins being lost. BitInstant was a more user friendly company that charged a fee for users to purchase or make purchases with bitcoin. What started as a side project to solve a problem, soon needed to grow and needed funding. After borrowing money from family and some smaller investors, the Winklevoss Capital Management group stepped in with the $1.5 million. This business grew so rapidly that they were processing almost 1/3 of all of the bitcoin transactions.  Shrem became widely known and respected in the bitcoin world, and was a founding board member of the Bitcoin Foundation.  As an early pioneer in this space, he was really making a name for himself.

When Shrem landed at JFK returning from an e-commerce convention in Amsterdam, he was arrested.  He was later sentenced to 2 years in prison in which he was released in June of 2016.  His stint in prison was due to allegations that he conspired to launder $1 million worth of bitcoins to help users of Silk Road make illegal purchases. He plead guilty to a lesser charge and had to forfeit $950,000 when sentenced.

Ross Ulbricht, founder of Silk Road, an anonymous marketplace on the dark web hosted the purchase and selling of anything, but was most well know for illegal drugs. Ulbricht launched the website in 2011, and it took the FBI until 2013 to shut Silk Road down and arrest Ulbricht.  In less than a month, Silk Road 2.0 was live and being run by former administrators of Silk Road.  It took another year to shut down Silk Road 2.0 with the new alleged operator arrested.  Ulbricht was convicted of either charges related to Silk Road and sentenced to life in prison.  He recently waived rights to his assets in which $28 million was seized by the government, most of the assets being in bitcoin. This brought to the forefront exactly what everyone feared, bitcoin and cryptocurrencies are untraceable making it even more difficult for criminals and their activities to be tracked. Everything that makes cryptocurrencies more pure and direct as a means for currency also make it perfect for illegal activity.

Buy it with Bitcoin
With Bitcoin value currently at all time high levels, most would say the simple investment strategy, “you don’t buy at the high, you buy at the low”.  However, most experts are anticipating that the value of one bitcoin could raise to hundreds of thousands of dollars.

In a short series done by CNBC, Seema Mody tried to last a week solely using bitcoin. This quickly became an early realization that bitcoin still isn’t widely accepted. She was able to make it through the week finding creative ways to get a metrocard and locating the few restaurants that would accept bitcoin directly, although spending much more than she would have using US dollars. This trial was in New York City which one would think would be a likely place that would accept the currency… unfortunately, it was not.

Here is a current list of companies that are accepting bitcoin (some only in certain locations):

WordPress.com

Subway

Microsoft

Reddit

Virgin Galactic

OKCupid.com

CheapAir.com

Expedia.com

Whole Foods (only through a gift card purchase system)

RE/MAX London

T-Mobile Poland

Some well know business are on this list, but it is however a relatively short list considering how many businesses are out there.  This suggests there is still a lot of room for growth.

Aston Plaza and Residence in Dubai is catching a lot of attention as British entrepreneurs, Michelle Mone and Douglas Barrowman, launched this bitcoin-priced real estate development. They have partnered with BitPay to provide a platform for people interested in purchasing real estate in bitcoin. This is the same platform that Virgin Galactic and Microsoft use to accept and process bitcoin payments.  Mone states that “Our Dubai development is the pinnacle of design, architecture and commerciality, but my partner Doug Barrowman and I didn’t feel this was enough. We wanted to offer the property, tech and blockchain community a unique and exclusive opportunity by merging the property and tech sectors together in a true first for the industry. With Dubai [Expo] 2020 coming up, it is the perfect time and place to do this.”  This project is valued at $325 million, containing two towers with 1,133 condos slated for completion in 2019. Today units are starting at 23BTC, or roughly $131,000 and you can buy one with bitcoin.

Is the Bubble about to Burst?

Before you can say if the bubble is about the burst or not, you need to first know how to spot a bubble.  Here are some signs that we may be on the verge of a bursting bubble in any market.

  1. It’s all you hear people talking about. The media, the coffee shop, the water cooler at work. It doesn’t matter where you go because it seems to be a topic of conversation everywhere from everyone.

Yes there’s starting to be more coverage and discussions about bitcoin today, but we are far from it being a mainstream topic.  It is actually far from this as people are aware but don’t understand it fully.

  1. Everyone starts quitting their jobs to get into the industry. In the United States, this was a big sign during the housing boom that led to the bubble bursting in 2008.  You couldn’t throw a stone without hitting 3 real estate agents.  Everyone saw all the money being made and wanted in, then the bubble burst and all these people were impacted.

This is hardly the case in the cryptocurrency world today, in fact, if you have a conversation with anyone heavily vested in cryptocurrency, most will tell you not to put all your money into bitcoin, but instead invest what you are ok losing.  Most of the early pioneers also invested or put in money expecting no return.  This is not the sign of a bubble mounting but instead suggest we are still in the early days of bitcoin growth.

  1. Rising prices without the fundamentals to back it up. The dot-com bubble exemplifies this exactly. Just before the bubble burst, the dot-com prices started to skyrocket on internet based business, but when you take a close look, most of the businesses were operating at a loss, suggesting that there wasn’t the substance to justify the rapid price spikes.

Bitcoin prices are increasing, however they are very very far from the estimated highs that people are expecting growth to reach. The cryptocurrency market also seems to be growing at a steady pace when looking at the price tracking graph over the years. When prices start to triple over night, we will be in a different situation, but we aren’t there yet.

  1. Government involvement, politics. Looking back at any large bubble, politics and the government seem to be a key indicator that things are about to burst.

This is the area that is causing the most speculation in the cryptocurrency governmental regulation. At the moment, there isn’t much involvement or regulation. There is still a long way to go on the governmental and political involvement.  Some think that prices won’t reach the highs that they can until governments step in and get on board, while others think that cryptocurrencies are growing and will only get to the levels expected because of the lack of government.  Either way, bitcoin isn’t showing signs of being close to the bubble here.

Cryptocurrency is still showing immense opportunities for growth and profitability.  With any investment, the standard advice always applies. You have to ask yourself what the tolerance is for risk while also keeping in mind that you will win big when you bet big.