Thoughts from our CoFounder. The following is an excerpt from our most recent newsletter.
Early Wednesday morning (Jan. 14th) , large market sell orders on Bitstamp pushed the price down rapidly, hitting a low of $152 before rebounding. Other exchanges fell at the same time but not as drastically, with Bitfinex falling to $166 and OkCoin to $176. The price fall can most likely be attributed to traders taking advantage of market sentiment, high volatility, and easily accessible leveraged trading options. As we have repeated in the past, guessing short term price movements is practically impossible in the current bitcoin market because a lack of liquidity means that traders can relatively easily move the price up or down with much less money than would be required in traditional markets. Traders look at the sentiment of the current market, then either add buy orders, sell orders, and/or release rumors through various online channels, pushing the price in the direction they desire. At the same time, they make leveraged trades in the direction they push the price, making back more bitcoin than were originally required to push the price the direction they wanted. Rinse and repeat. For this reason, any interest in bitcoin as an investment opportunity should be as a high risk/high reward long term investment. If bitcoin and the block chain succeed, the upside potential is enormous.
After the most recent price collapse, many Bitcoin thought leaders went to social media to proclaim price doesn't matter, but that's ridiculous, price always matters. Many individuals and companies throughout the Bitcoin ecosystem hold bitcoin and downward price fluctuations can do serious harm if they haven't properly hedged their risk. These same thought leaders constantly recite the mantra that the block chain is more important than bitcoin, but what they fail to realize is that bitcoin the currency/store of value is required to enable the incentive to maintain a decentralized block chain. Essentially, miners are paid bitcoin to run the decentralized ledger that is the block chain. As a result, bitcoin's value is backed by the utility of the block chain and vice versa. The current bitcoin market cap (the value of every bitcoin added together) is a little less than $3 Billion USD at the moment. That is minuscule when compared on a global scale to companies such as Apple, JP Morgan, and even Western Union at $620 Billion, $200 Billion, and $9 Billion respectively. If the Bitcoin network goes mainstream, the upside potential is enormous, but short term bitcoin price fluctuations will remain impossible to predict and investors should act accordingly. Only invest in bitcoin if you are looking for a high risk/high reward long term investment.
The following chart by Pantera Capital does a good job of showing the upper bounds of potential bitcoin valuations.