From Tom Dyson, publisher, Palm Beach Research Group: It’s one of the coolest financial ideas I’ve seen in a long time…
In 2013, it rose from $10 to about $1,150. Then, it crashed, falling below $200 at the beginning of 2015.
This year, it’s been quite stable, trading between $200 and $300 all year. Today, it’s at $228.
I’m talking about the “cryptocurrency” bitcoin.
Bitcoin’s early rise was due in large part to its usefulness in buying drugs over the Internet.
But this market’s taken some hits from the U.S. federal government. The government shut down the online black-market website Silk Road and its successor.
There are—and will continue to be—more sites like Silk Road. But many customers are now wary about using them. They’ve lost money holding—and losing—bitcoins in these accounts.
It’s also a closed market. When someone buys drugs with bitcoin, he sells his dollars for bitcoin, then gives bitcoins to the vendor. The vendor then takes these bitcoins and exchanges them for dollars.
So, bitcoin only has as much value as there’s demand for it as a “float currency.”
Ultimately, dollars are still being exchanged for drugs. Bitcoin is just the bridge.
So, I don’t see the “Silk Roads” of the world driving bitcoin prices higher.
Also, I don’t think people will use bitcoin to buy other items online. There’s too much inertia… The dollar works fine.
Who wants to learn about something new, set up accounts, and figure it all out, when the existing system seems to work just fine?
So, I don’t see e-commerce driving bitcoin higher.
Now, some people are attracted to bitcoin for investment reasons. They want to buy it and hold it.
That’s because they think it’ll be important in the future.
But a lot of these people have already bought… and they’ve been burned. If bitcoin starts gaining wider acceptance, maybe they’ll come back. But everything I understand about markets and sentiment tells me it’ll be a long time.
(Besides, I happen to like the dollar right now. But that’s a story for another day…)
So, what’s next for this cryptocurrency?
I don’t have a crystal ball, but my best guess is bitcoin will keep falling until it’s trading below $100… where it’ll probably be forgotten and never rise again.
But this will take a while… maybe a few years and a few false dawns… as people lose interest.
It’s the “guillotine and sandpaper” theory of market crashes…
First, you get the guillotine as fear causes a huge and sudden crash in price. Bitcoin has already passed this stage.
Then, you get the sandpaper stage, where markets’ apathy gradually “grinds” people out of the trade. They get bored and forget it. This is where we are now.
Bottom line: Don’t trade your dollars for bitcoin as an investment. That trade won’t end well.