My original intent was to do a blog entry on the Consumer Electronics Show (CES) as I’m both a nerd and I love electronic gadgets. With so much of the show being dedicated to the Internet of Things (IOT) and drones, I figured I’ll have plenty of opportunities to discuss those things and their impact. Plus…I’m not sure how much we really need to discuss a $1,100 wi-fi showerhead (installation cost not included).
Then my mom started discussing bitcoin with me for the first time in a while, and I decided I’d go there first. I initially got interested in bitcoin about 3 ½ years ago, when a co-worker described it all to me. The trader in me said that’s great, we have something new to trade. I told my colleague I thought bitcoin was a “2 year trade,” but the Blockchain is the key going forward. In other words, I thought bitcoin would be worth pretty close to zero by now. My argument was that some country would replace paper with a Blockchain based electronic currency and that would be when the crash to zero comes.
That was 3 ½ years ago. Bitcoin was trading around $100. Now, around $900 after eclipsing $1,100 last week. Just another trade I was a bit wrong on. Thankfully (?), it wasn’t easy to short them.
5 Year Weekly Bitcoin Price Chart
My mom asked me “Why are bitcoins worth $1,000 each?” I said because that’s what someone will pay for them. Simple enough. Everything is “worth” its current price. If someone is willing to pay “$ X” but not “$ Y” then the asset is worth X. That’s why we have exchanges and markets. So why is bitcoin worth nearly $1,000? Because there are people, the buyers, that think so. And since others are selling them up there, obviously some people think bitcoin is worth no more than that. The sellers.
Sure, it can be used to buy some things. Overstock.com made a splash in 2014 when they agreed to accept bitcoin for purchases. It receives bitcoin for under 1% of sales. Closer to a small ripple than a splash. Not even news worthy anymore. And yet, it’s currently trading in the $900 range. Primarily, it is taking on a role as one asset to use when in doubt about a currency system. Much of the purchasing is said to come from China. And the Chinese government has a way of crushing these rallies with a sentence or 3 about how disapproving they are. Boom. $1,150 to under $900. Just like that.
While trading gold futures on the COMEX in New York for many years, people asked me why gold was worth anything. Back then, it went from over $550 an ounce when I began trading down to under $300. This was after hitting a high of over $800 a few years earlier. There were those who said it was going to go down much further. After all, it’s just a shiny yellow metal. It’s not iron ore, necessary to build buildings. People wear it to look nice. And that’s much of its use. Yet, here we are today with gold, like bitcoin, in that rarified $1,000 price tag range.
When I was asked the question of why it’s worth whatever the price was at the time, I said because “perception is reality.” There has been a perception for thousands of years that gold is a store of value. When confidence in currency values wane, or the perception is that the value that of paper will go down, people buy gold. I continued by explaining that it’s awfully difficult, if not impossible, to reverse thousands of years of perception in a just couple of years. Gold wasn’t going to zero.
So that’s the idea. Things are worth what is paid for them at that precise moment in time. Cabbage Patch Dolls caused fights, near riots, and a robust secondary sales market when first introduced for the holiday season in 1983. I believe it was Tickle Me Elmo dolls that were flying around our trading floors for hundreds of dollars in 1996. Retail price? $35.00. Crazy, huh? I’ll bet a lot of those “Don’t unwrap it, this is an investment!” Elmo dolls have a serious layer of dust. Cabbage Patch too. Did your kid ever cry in the last few years because you couldn’t locate a Cabbage Patch Doll? Didn’t think so. But I’m sure they cried over something else, maybe Hatchimals most recently, because demand was so great you couldn’t get them in time for gift giving. Seems puppies aren’t what they used to be.
These are “Spot” markets, which is how bitcoin currently trades for the most part. This could easily change soon with ETF’s and exchange traded futures. So now people will not only buy bitcoins at today’s price, or value, they will be able to bet, I mean invest in future price movements more easily.
And mom keeps asking, “Why?” To that, I don’t have a real good material answer. I just know that something I bought first at about $120 is now either side of $1,000; 20/20 hindsight, “Wish I bought more.” But at the time I saw the long term value in the backbone of bitcoin. The technology. The Blockchain. And I do believe Blockchain technology will revolutionize record keeping worldwide. Securities, Legal, Real Estate, etc. But I’ll leave that to another day. Can’t write about both parts in one entry, too much to say.
Bitcoin itself? We’ll see. Can’t hold one, like a gold bar or a Cabbage Patch Doll. Most retail establishments don’t see it as money for purchases. But it’s worth around $900. Perception. Bulls vs. Bears. That’s what makes markets great! Even if mom still doesn’t get it.