Bitcoin (BTCUSD) seems to hit new record highs on a regular basis these days, and it just topped $11,900 in the hours before I wrote this -- yet another new all-time high. This represents an increase of more than 1,200% in 2017 alone.
Industry experts are split on bitcoin and its remarkable run. Many say the digital currency could be worth $25,000 or even more by the end of 2018, and two notable experts have forecast a $1 million price tag by 2020. On the other hand, several economists and banking experts have gone so far as to call bitcoin a "fraud" and claim that this is a bubble unlike anything the world has ever seen.
To be fair, there are solid arguments to be made for both sides. Under the right conditions, bitcoin could certainly become worth much more than it is today, but if the numerous challenges facing the digital currency remain unsolved and speculators start to head for the exits, a massive plunge in the price of bitcoin could definitely happen. Here's a rundown of the bull and bear cases for bitcoin and what it means to you as a prospective investor.
If bitcoin becomes a mainstream currency, the current price could be a bargain
Most people on either side of the argument would agree that bitcoin is not widely used as a currency just yet. That is, most people who own bitcoins are either early adopters of the currency or are speculators who believe the currency will be worth more in the future, and are driving the price based on simple supply and demand dynamics.
So, it's fair to say that bitcoin's future potential is at least somewhat priced in at this point.
However, if bitcoin does catch on as a mainstream form of payment among consumers and merchants around the world, it's certainly conceivable that bitcoin could be worth a whole lot more. Based on the recent $11,900 record, the value of all bitcoins in existence is about $195.2 billion. Meanwhile, the global money supply is estimated to be nearly $70 trillion. If bitcoin becomes a widely used currency around the world, it could certainly become a multitrillion-dollar portion of the money supply and therefore be worth many times its current value.
Challenges and other possible downward catalysts
Not so fast. Before bitcoin could become a widely used currency, certain things would need to happen. Just to name a few:
- Bitcoin would need to become much less volatile. After all, nobody wants to rely on a currency whose value regularly fluctuates by 10% or more within a week.
- Bitcoin would need to become much easier for the average (not tech-savvy) consumer to use.
- Bitcoin would need to be widely accepted by merchants as a payment option, which would mean that merchants would need to understand bitcoin and know how to use it.
- The threat of bitcoins being hacked or stolen would need to be virtually eliminated.
- The blockchain would need to be able to handle more transactions that it's currently capable of. The blockchain network can currently handle about three transactions per second. In contrast, Visa's network regularly processes 2,000 transactions per second. In other words, bitcoin transactions could not efficiently be processed if usage soars.
One of the most notorious bitcoin critics, JPMorgan Chase CEO Jamie Dimon has called bitcoin a fraud and that it is a bubble that will eventually burst. "It's just not a real thing, eventually it will be closed," Dimon said in September 2017. At a conference in October, Dimon even doubled down on his comments by saying that if people are "stupid enough to buy it," they'll pay the price for it one day. Yale economist Stephen Roach recently said that bitcoin is in a "dangerous speculative bubble," and that the cryptocurrency is a "toxic concept for investors."
Dimon and many other experts who think bitcoin is in a bubble does think that the underlying blockchain technology does have value, but that doesn't mean that bitcoin itself is worth anything. Roach cited bitcoin's lack of intrinsic economic value, and he has a point. As I mentioned earlier, bitcoin is not widely used by consumers yet, which is where a currency would derive its economic value.
Bitcoin futures -- what could they mean?
One wildcard is the upcoming rollout of bitcoin futures, which will begin trading on the CBOE in just a few days. While this certainly adds legitimacy to bitcoin as an investable asset and could help stabilize the volatile digital currency, it also allows traders to make speculative bets on the price of bitcoin, in both the upward and downward directions.
Experts have generally suggested that more downside bets will be made, particularly as hedges by people who already own bitcoin, which could certainly put downside pressure on the price. Many hedge fund managers have also expressed bearish sentiment toward bitcoin, and may see this as a compelling shorting opportunity once the futures are rolled out.
Bubble or bargain? What investors should know
At this point, there's simply no way to know which side is right. I could see bitcoin rising to a six-figure price tag under the right circumstances, but I think that a crash to a small fraction of the current price is just as likely, if not more.
The bottom line is that it's important not to confuse investing with speculating, and bitcoin is definitely a speculative purchase right now. The prospect of bitcoin jumping to $1 million in just over two years is certainly appealing, but under no circumstances should anyone buy bitcoin with money they can't afford to lose, because if it turns out to be a bubble, that's exactly what could happen.