14 minutes reading time (2753 words)

Don't Fall For The Hype: Why Bitcoin's $10,000 Price Does Not Reflect Its True Value

20190627-170357

This is an article that was written 18 months ago in December 3rd, 2017 on Decentralize Today's medium blog. We revisit it here after the end of the bear market of 2018-2019 as Bitcoin breaches the $10,000 mark once again, both upwards and downwards, with a fresh perspective and the luxury of hindsight. 

--------------------------------------------------------------------

​News outlets haven't had 24 hours to let the "$10,000" news simmer and the price of Bitcoin already rose to $11,500. By the time they published their "$11,000" piece, it already dropped back to $9,000. Then, as soon as they entered the last word on their "Bitcoin is crashing!" article, it's back above $11,000 per Bitcoin.

Amazing? Crazy? All of the above? It may seem so, but this is not unprecedented.

We saw this back in 2013, with a media frenzy when Bitcoin was approaching $1,000 that fueled that year's "bubble". In January of that year, one Bitcoin was trading at around $15.00, rocketed to $266 by April, and then crashed back to $50 within days of reaching that peak. Like a Phoenix rising from the ashes, by November it had already reached $1,000, peaking at $1,242 on the largest Bitcoin exchange of that time, the now defunct Mt. Gox. That's an almost 100X increase in 11 months, an order of magnitude larger than this year's (2017) 10-fold run up.

The funny thing is, the charts then are almost identical to the ones today, and news articles look almost exactly the same. Just add one zero.

UPDATE: True enough, the price of Bitcoin shot up just shy of $20,000 (https://www.cnbc.com/2017/12/06/bitcoin-tops-13000-surging-1000-in-less-than-24-hours.html​) less than 2 weeks after the original post. The media frenzy was like nothing we ever saw before, and the amount of money being traded globally in the Bitcoin markets were in tens of billions, with the market cap of Cryptocurrencies reaching more than half a TRILLION dollars.


The media gobbles this up because people are fascinated by this stuff. Stories of people finding 5000 BTC in an old hard drive that they bought for $25 in 2009, a man throwing away 7500 BTC by accident and scouring a landfill to try and find it, a man buying pizzas for 10,000 BTC — It's the sizzle to the steak, and it sells.

The Other Side

People love it when markets rise, but what goes up must come down, and Bitcoin is not immune to this. History shows us three major "Bitcoin Bubbles", and a lot of volatility in between. Swings of 20–30% in one day are not uncommon in the Bitcoin world, but to most people this can be quite terrifying. For example, Bitcoin broke $11,500 a couple of days ago but then crashed back to $9,600 and lost 20% of its value overnight.

These are not isolated cases. In fact, it's quite common. There's that time it crashed from $260 to $50. Bitcoin was declared dead.

Then there was that time it crashed from $330 to $180. The despair was palpable.

​Or that time it crashed from $600 to $250. "Will it ever end?" People asked. Even true believers started to doubt. A lot of people gave up and sold out.

So Bitcoin doesn't perpetually go up, what a surprise. If you look at short term linear charts, yes, there are major downswings at any given point in time. It does not always go up for 12 months straight, like this year.

UPDATE: Again, like clockwork, as soon a Bitcoin peaked at $19,800, it crashed hard. Over the course of 2018, It hit what was seemingly its bottom at $6500, but then by December, it dumped even harder to $3,150. Despair was once again in the air. Bitcoin obituaries shot up to more than 300 by 2019. We were "going to zero".

​Yet if you look at the logarithmic chart below, Pre and post 2018:

Log charts are better than linear charts in measuring performance over long periods of time. A jump from $1 to $30 will look tiny compared to a jump from $100 to $200 in a linear chart, even though it is a 3000% increase versus a 100% increase. A log chart fixes this problem.

We can see on this all-time price chart that since Bitcoin was invented, it has been on a steady upward climb, with some major swings in between. You'll notice that in the early days, the swings were actually bigger and more volatile.

Three times in the history of Bitcoin, the price went parabolic, meaning it went almost straight upwards on the chart. An almost vertical climb on a log chart is hard to achieve unless the price goes up very very fast. This was the case in 2011 and twice in 2013. In both years, Bitcoin increased by at least 100-fold. As you can see, in this 2017 climb from $1,000 to $11,000, we haven't formed a parabolic uptrend just yet. It will need to track upward towards $100K per Bitcoin really fast for that to happen. We are not there yet and we have a long way to go.


The Bitcoin Hype-Cycle 

The peculiar thing about Bitcoin's price is that it goes through cycles. First, a slow and steady accumulation by people who understand the tech and buy it when it is considered worthless. This is usually after a big price "crash". It then starts to reach a point where the media picks up its growth again, and then, a parabolic buying frenzy ensues where even your grandma starts buying Bitcoins. Finally, after reaching a dramatic peak, it finally pops and drops, causing panic selling, leaving only those who truly understand the tech holding on to their coins, the "HODLers". Then its back to square one, with a higher base price and a larger user base. Rinse, repeat.

The Obsession with the Price While Overlooking the Value

Price is not equal to value. The price of water is cheap, but it is pretty valuable to us. I mean, we'd die in about three days without water. If water suddenly became scarce, its market price would skyrocket. In a zombie apocalypse scenario, gold would be worth a lot less than water, guaranteed. Today, simple bottled water can be more expensive than gasoline per liter, when just two decades ago the idea of buying water at all was considered crazy. The market decides on the price, but the value of something lies outside its price.

In the same way, the value of Bitcoin has nothing to do with its exchange rate.

When Bitcoin was worth exactly zero dollars, it already essentially solved the previously unsolvable 30-year old computer science problem called the Byzantine General's problem — how to reach agreement with other agents over an untrusted network of communication, or distributed consensus. That value proposition was there from day zero, even if the price of one Bitcoin was essentially zero.

"A lot of people automatically dismiss e-currency as a lost cause because of all the companies that failed since the 1990s. I hope it's obvious it was only the centrally controlled nature of those systems that doomed them. I think this is the first time we're trying a decentralized, non-trust-based system." — Satoshi Nakamoto, 2009

Don't Trust — Verify

Because of Bitcoin, we don't need middlemen to transact — hell, we eliminated the need for trust. We can transfer value over the internet without asking permission from a gatekeeper. The internet did this for the transfer of information, whereas before, we had to go to the post office to send mail, through a telephone operator to call someone overseas, or a publisher to let the world read about our stories and ideas. Bitcoin is doing this today, letting us store value like never before and transfer value from one owner to another without permission, globally, and instantly.

Just like how the value of your paper money is not in the paper itself but in the government or authority that issues this paper, the value of Bitcoin is not in the tokens used to exchange with each other, but in the network that allows this exchange to happen.

The price of Bitcoin is the least interesting thing about it. The value of Bitcoin is in its ability to do what it set out to do, and do it best. When you truly understand the technology, you'll realize it's true value.

A Financial Revolution 

Over one-third of a trillion dollars. That's the total amount of cryptocurrencies in the world. $165 Billion belongs to Bitcoin alone, which just shows how dominant network effects can be. Because of Bitcoin technology, the power to create and exchange money was granted to every person on earth and is no longer the monopoly of kings, institutions, and oligarchs. The printing press did the exact same thing for the power to create and exchange information, which started the renaissance and led to the industrial revolution. It's a return to the original spirit of why money was invented in the first place.

There is immense wealth being created right before our very eyes, but it is happening so fast that most people are ignoring it.

Back when I was a kid I loved reading the Guinness book of world records, and one of the most fascinating things for me there was the list of richest people in the world. In the late 80s to early 90s, it was consistently the Sultan of Brunei, with his golden throne, 200 Ferraris and a gold plated Rolls Royce that made the top of the list.

Suddenly, in the late 90s to early 2000s, it was Bill Gates and a bunch of other geeks that made it to the top of the list. Where the hell did they come from? How can a bunch of geeks writing software, wearing sneakers, and working from their garages become wealthier than a King with solid gold thrones? Why did this happen?

It happened simply because the World Wide Web was just much more valuable than gold and oil. There is much more value in a global network allowing people to store, exchange, and transfer information than in yellow shiny rocks and fossil fuels from under the ground.

The exact same thing is happening today in the cryptocurrency world. Suddenly, geeks who toiled over establishing the Bitcoin network voluntarily and thanklessly for years are being paid back by the market built upon the backbone of the software they built. Pioneers are paving the way for a new generation of financial applications that will usher billions of new users to the internet economy. There are some among them who are already approaching Billionaire status, and many more will follow.

Wealth creation is a good thing, and the concentration of this wealth is not necessarily a bad thing. How the wealth was acquired is what is important — honest wealth. Bitcoin is honest money. No coercion, no unfair advantage, no abuse of power, and no abuse of labor was needed to establish the newfound wealth of the original Bitcoin and cryptocurrency trailblazers. This is why trust fund babies who have been "trading for decades" shit on Bitcoin — they cant accept the fact that a geek who took an early risk on an unknown technology is now much wealthier than them, in the same way I can imagine a guy sitting on a solid gold throne must have scoffed at the idea of a geek in a garage becoming wealthier than him.

Bitcoin and cryptocurrencies will make a lot of people financially independent, and that's a great thing. Millions of people who never had access to capital will be able to pursue their goals and build things that could ultimately help humanity as a whole.

The Separation of Cash and State

Bitcoin is now the among the top 10 most valuable currencies in the world, with roughly only about 0.01% of the world's population owning or using it.

 We could be watching one of the biggest financial bubbles in history unfold with this cryptocurrency mania. Yet on the other side of the coin, there is also the non-trivial possibility that we are witnessing something remarkable happening before our very eyes — the return of the separation of cash and state.

People are hungry to be part of the world of finance. What was once the private playground of the rich and powerful, the middlemen and brokers, institutions and corporations — the world of investing and financial exchange — have been eclipsed by thousands of common people empowered by the free and open nature of blockchain-based finance. The people that can't afford the buy-in to the current system, ones who do not pass the vetting of its gatekeepers and are left with nowhere to go. They see Bitcoin and cryptocurrencies as a permissionless option to participate in the global financial economy and a way out of their own rat races. They invest hard earned money, a few bucks here and there, hoping to make honest gains on their own, even risking losses, instead of being at the mercy of consumerism and inflation.

And it works. Young men and women from all walks of life, from the Philippines to Kazakhstan, are putting in the time and effort, finding jobs in the industry, making money, and then teaching or inspiring others to do so too.

Children born from 2009 onwards are going to live in a world where cryptocurrencies always existed and are the norm instead of a fad. They will never understand the need to wait "3 to 5 business days" for money to be transferred, to wait in line at a bank, to pay 10% to send money. It's easy to think that this is wishful thinking, but remember, lot of people called the internet a fad too. Now we no longer go online, we live online.

Technologies of tomorrow like robotics, artificial intelligence, autonomous machines, and the Internet of Things will not use credit cards, a technology never intended for an online network, but will use blockchains and cryptocurrencies, with Bitcoin as the global reserve. This is almost a certainty.

Will crypto markets crash in between? Most likely. In the same way the dotcom bubble burned over six trillion dollars back in 2000, Bitcoin and cryptocurrency markets will probably go through the same cycles.

Notice I said Markets? Markets crash, technology doesn't. Technology evolves or becomes obsolete. The risk of Bitcoin going obsolete at this point is close to zero.

Market bubbles establish the true players in the market and eliminate all the ones who are there for a quick buck. What's important is that the technology is real, and it is here to stay.

The Future of Money Itself — A Very Tall Order

"True confidence lies not in being sure you are right, but in not being afraid to be wrong."

Bitcoin's upward trend becomes logical once you understand the many layers of the technology behind it. Add to that the thousands and thousands of people who, for their own financial self-interest, will work day and night and fight tooth and nail to keep the fire going, building the network, protecting the network, being the network, and you've got an unstoppable force or innovation and value pushing us towards the next evolution of money.

So what's going to happen? Well, no one can predict what is going to happen.

These are merely possibilities that I and others have explored, based on the information we have today. To say we know where this growth trend will end up is just blind hubris. That's why the work never stops, that's why we drive the direction instead of letting it drive us. As I write this, the positive feedback loop and self-reinforcing trend that Bitcoin started keeps moving forward and upward, with no equilibrium in sight, and with the end-game being a global paradigm shift in the way we store value and transact with one another.

The future of money will lie in the hands of its users, the people, the sovereign individual, and not in the powers that be. Money is, in fact, a form of speech.It is just a message about the transfer of value from one to another. Because of the Bitcoin protocol, we finally figured out how to use our most powerful communication channel, the internet, to exchange value with anyone, anywhere, anytime, without permission or friction, freely.

We will live in a future where Bitcoin set money free.

______________________________


Related Posts

 

Comments (0)

Rated 0 out of 5 based on 0 voters
There are no comments posted here yet

Leave your comments

  1. Posting comment as a guest. Sign up or login to your account.
Rate this post:
Attachments (0 / 3)
Share Your Location