Kay Rieck: Bitcoin’s historic double bubble
Bitcoin, politely, has been a rollercoaster over the last year. Many have described it as a bubble. But perhaps what is more interesting than the price itself is that if it is a bubble, it has uniquely been inflated twice. There could be something beyond hyperbole that is driving the price inflation and it could, just possibly, be potential. But what does it this mean for investors?
Bitcoin started 2020 at USD5,000 and ended it at USD28,000. In January 2021, it reached USD36,000, rose to USD50,000 the following month, hit the giddy highs of USD60,000 in March, USD62,000 in April, and then crumbled to USD40,000 in May. What June holds is anyone’s guess.
The bull market has been fascinating, and it has driven interest in other cryptocurrencies as well. Nothing that has performed quite as well as bitcoin, but perhaps at this stage nothing should.
A lot of the analysis, both positive and negative, has focused purely on the numbers, but I’d argue that in some ways they have missed a fundamental point. Economic bubbles have inflated (and been inflated) before. We had tulip mania in 1637, the south sea bubble in 1720, all the way through to the dot com boom at the turn of the millennium. They all had one thing in common: They burst, prices returned to more credible levels for the asset in question, and, while price may have recovered slightly as investors returned, the bubble didn’t reinflate.
This is one of the things that makes the bitcoin situation fascinating. At the start of 2017, the BTC/USD price was around USD900. By the end of that year it went up to USD17,000. At that point everyone started calling it a bubble and sure enough, by the end of 2018, the price plummeted to around USD3,500, where it languished for months before recovering to around USD10,000 during 2019 and the first half of 2020. Which is when it started rising again.
The reasons behind the second rise are complex, and there is certainly more to it than simply provocative tweets by evangelising rocket scientists, but the fact that it has happened is the fascinating thing. And it suggests that there might just be some potential in the broader technology.
…and the investment perspective?
This is not to say that this potential is necessarily in bitcoin itself. There are significant environmental questions that need to be answered for this first-generation cryptocurrency, but it could be that the potential is in the wider area, and potentially with blockchain, the underlying technology that manages the entire crypto sector.
The bottom line is that bitcoin has given us quite a story over the last couple of years, and it is a story that is long way from being over. It should give economic historians something to write about for many years to come.
About the author
Kay Rieck has been active on the investment side of the oil and gas sector for more than two decades. Starting his career as a financial adviser and stockbroker on the New York Stock Exchange, he quickly developed an interest in natural resources and associated assets building his expertise with investment banking and asset management roles at the New York Board of Trade and the Chicago Board of Trade. Utilising his exceptional network of global contacts, he started his first exploration and production company in the US in 2008, selecting investments across the Haynesville Shale, Permian basin, Eagle Ford shale, Dimmit county and elsewhere that offered exceptional prospective returns.