The Bitcoin mania is reaching a fever pitch lately. The “people’s currency” is passing the one “technical” test after another, crossing the $5,000-mark, the $6,000-mark, the $7,000-mark, the $8,000 –mark, and the $9,000 mark in a matter of weeks. And the $10,000-mark is within reach, given the current Bitcoin price–$9,600 as of Monday afternoon
Bitcoin has gained 17.16% in seven days and 900% for the year. Bitcoin Cash and Ethereum have also soared in sympathy, gaining 38.17% and 30.55% respectively in the last seven days.
Coin/Investment Trust %7d*
Bitcoin (BTC) 17.16
Bitcoin Cash (BCH) 38.17
Ethereum (ETH) 30.55
Bitcoin Investment Trust Shares (GBTC) 36.37
*As of Monday, November 27, 2017, at 2 pm
To some, these astronomical gains bring back the memories of the dotcom era mania, when tiny technology companies with the “dot.com” logo next to their names would double and triple in a matter of days or even hours. Others will search for a parallel to Bitcoin mania to centuries-old tulip mania.
To be fair, rapidly rising prices do not automatically characterize an investment as mania, provided that the market value of the investment is very close to its “intrinsic value.”
What’s Bitcoin’s intrinsic value? It’s hard to determine, as Bitcoin isn’t an asset to apply the expected value of the future cash flows formula. But it is a medium of exchange. And one way to calculate Bitcoin’s value as a medium of exchange is to use the quantity theory of money.
But that requires generous assumptions about the volume of everyday transactions where Bitcoin is used in the place of national currencies. CNBC, for instance, estimates that the transaction value of Bitcoin is $1,142, a fraction of Bitcoin’s current market value—that’s based on their own assumption that Bitcoin transactions amount to $240 billion.
If that isn’t a mania, what is it?
Still, every financial mania is different and can be easily confused with healthy bull markets that run up on economic fundamentals. But they all share three things: hype, investment instruments that make the bubble asset accessible to the investor masses, and easy money.
Bubbles flare up with ‘investor hype’ over a popular theme – an exotic product that promises to revolutionize the world and make investors quickly rich in the process.
Soon Wall Street develops the vehicles that ease broad investor participation, like a mutual fund or an ETF—turning investor hype into a market contagion and pushing the price of the underlying assets ever higher.
Then comes the “air,” easy money that helps the bubble to grow bigger and bigger. Bold predictions by market gurus and talk in the mass and social media create the buzz that helps prices double or even quadruple in a matter of days, even hours—turning market contagion into mania. Investing in this theme reaches fever pitch, as no investor wants to be left behind.
Investors who have been on Wall Street long enough know all too well how bubbles and manias end; and millions made are lost much faster than they were made. And then some.