Bitcoin’s end may be forecasted in its recent price run up (I intentionally didn’t say value because it has no intrinsic value). Late last week the digital currency traded above $20,000 for the first time according to an article in the New York Times. That article also noted that the crypto currency started the year below $1,000 and as recently as this October coins could be had at a now very attractive $5,000 each.
The Times article said the factor driving the new interest is the increasing interest from Wall Street and for good financial reasons,
At the current cost, the value of all Bitcoin in circulation is about $300 billion. To get a sense of how big that is, all the shares of Goldman Sachs are worth about $90 billion.
But the only comparison should be with other currencies like the dollar. Bitcoin’s price is tiny compared to the M1 money supply, a measure of dollars in circulation. M1 is hovering near $3.6 trillion according to the Federal Reserve Bank of St. Louis.
M1 is a good jumping off point because it reminds us that real money is regulated by something other than the marketplace and that regulation is much more transparent. Every major country and currency has its own version of such an index except in Europe where some countries use the Euro but the principle is still the same. In contrast, Bitcoin has Coinbase, a San Francisco company providing brokerage services. We should note that Coinbase’s systems went kaput for an afternoon last week. That’s not exactly something to make you warm and fuzzy.
But the valuation (ok, I said it) is like blood in the water for Wall Street. Hedge funds and brokerages are lining up to trade in Bitcoin. Said the Times,
Coinbase now has more account holders than Schwab, and it has struggled to keep up with the growth.
But more troubling is the looming trouble that Bitcoin could deliver the the financial system,
The path for large investors has been smoothed by the Chicago Mercantile Exchange and Chicago Board Options Exchange, which have been racing to roll out Bitcoin futures contracts. Most banks are already signed up with these exchanges and consequently can immediately begin trading the contracts. The options exchange has said it plans to start trading on Sunday [December 10].
My friends involved in this say that Bitcoin and other crypto currencies provide a measure of freedom from government regulation, which is more conducive to doing business. But all of this freedom only reminds me of the words of Anatole France, an early 20th century poet, novelist and journalist, and Nobel Laureate, “The law, in its majestic equality, forbids the rich as well as the poor to sleep under bridges, to beg in the streets, and to steal bread.”
I see this run up as potentially destabilizing to the global financial system and quite possibly the black swan that the Trump administration didn’t see coming that produces its first real test. The fall out from the test might turn out to be worse than the crash.
(Cross-posted @ Beagle Research Group)