Bitcoin’s parabolic ascent has been trumpeted in headlines across the internet. With prices breaking the psychological $100 level and an almost 700% increase this year, it has both speculators and skeptics out in force. So why is it exploding higher everyday?
Bitcoin’s appreciation is actually the result of its inherent design. One of its biggest features is a fixed money supply of just 21 million Bitcoins, offering an alternative for those fed up with fiat currencies and Helicopter-Ben. As of writing about 11 million Bitcoins have been mined (total coins in existence can be tracked Total Bitcoins in Existance here, but the prospect of dwindling future supply and appreciation potential has long caused rampant hoarding issues with the digital currency. In a widely cited study last October, researchers found that about 78% of BitCoins had never been used in a transaction. With all the media coverage and rush of people buying Bitcoins, the risk of a deflationary spiral is a real one as the demand for coins can only be met through currency appreciation.
Bitcoin also currently has no method of recovering coins lost from digital wallets from either malicious software or human error. This means that an already tight money supply is even smaller than expected, and unlikely to be replaced unless Bitcoin abandons one of it’s core features. With only about 20% of Bitcoins circulating in the market, liquidity is much less than advertised which contributes to its incredible volatility. With just $10 million in volume a day (an incredibly small amount for a currency) and fresh demand pushing a small float, Bitcoin is trading very similar to another asset much loved by speculators and twitch-traders. Yes, Bitcoin is the penny stock of currencies.
As a blog focused on frontier investments, far be it from us to frown upon illiquid assets with parabolic growth. While we recognize it as a potentially lucrative trade, we are not fully buying into the hype and view Bitcoin as we would a penny stock. This means the usual caveats apply and so we leave you with some choice characteristics of the bane of penny stock speculators: the pump and dump.
- A large media blitz touting the stock as a can’t miss investment
- Shady background of founders/officers
- Early investors defending the stock religiously online
- Pressure to buy “before it’s too late”
- Revolutionary breakthroughs
- Large moves and volume on zero news
- Quick moves higher along with crashes in its trading history
Check out the full list linked above and draw your own parallels. Keep in mind that as a currency, Bitcoin may not be as vulnerable to the same dangers as equities, but we will look at its viability as a currency in a future post.