Bitcoin and Bubble Trouble

Bitcoin has more than tripled in value in the last month, soaring to almost $100 USD with an unprecedented market cap of $1 billion. In response, a handful of articles claim we're in a bubble and it's going to burst. Soon.

I can't say what will happen for sure, but let me play the devil's advocate and say that there is at least a reason for the elevated price levels. I believe there is some backbone to this boom for a few good reasons.

Demand for Bitcoin as an actual currency (not just a speculative good) is rising

Let's look at BTC's more notorious usage, as an anonymous way to procure illegal services. The infamous Tor Browser uses a method to estimate how many users are on Tor at any one time.

Their users metrics for the last year:

Although traffic is more volatile now, since September, 2012, Tor has a sustained and significant bump. This started at a relatively stable time period for BTC, which was trading at around $10.

We will assume that more users on Tor equates to more demand of hidden services which equates to more demand for Bitcoin.

And according to blockchain.info, the number of daily BTC transactions has trended upward over the last year from roughly 6,000 to 26,000 as of today. And this is excluding the 100 most popular BTC wallet addresses. These numbers include when someone is buying oxycontin on BMR or, more innocently, when someone is just transferring money to a friend.

In December this number was about 12,000 and has risen relatively steadily since then, long preceding this month's intense boom. Although, since March 13, it has taken a severe uptick.

My Wallet, the most popular eWallet service (in volume), has steadily risen in users from 3,600 in April '12 until it hit 50,000 users in December, when it suddenly doubled its rate of user acquisition. It went from 50,000 in mid December to 75,000 by the beginning of January and is continuing at that rate.

Market Behavior Precedes Interest In Market

Unless all these people joining the market were psychic, they didn't do it to catch a rising wave of Bitcoin profits, considering the first boom in price happened in mid January and the second now in March.

What this all suggests is that more people are engaging with BTC and they are not all doing it to speculate on the exchanges. Rather, it is likely that all this increase in engagement is what started the boom and is sustaining it.

I can not say yet what caused the sudden increase in market engagement. I can say that it was not media attention, because google trend data (which we can use as a good measure of online interest) for people searching for the keyword "Bitcoin" didn't really pick up until February, after the first boom.




The Pump Is Primed

So there is a lot more users in the market who want to buy Bitcoin a couple months after the payout for successfully mining blocks has halved. This drives the price up quickly. Then in February, Bitcoin breaks $20 for the first time since the crash back in 2011. Investor enthusiasm is on the rise and now the market starts to go bull. Then since that moment the market has been a rocket ship.

And yes, at this point there are speculators in the market. People who heard BTC was on the rise and wanted to get their fingers in the honeypot, but not everyone is like this. And that is why the market has stabilized, at least the last few days.

These dizzying heights are probably scaring some people into selling out, but so far there have been buyers who still want to hold BTC at almost $100. This brings us to today and it may look a little precarious, but all this media attention and the lure of a new $1 billion market is what has kept the prices afloat.

Is It Sustainable?

BTC has been compared to gold for a lot of reasons and I will give you mine. It is a store of value like gold and it is only as valuable as we all decide like gold, but unlike gold, much of the world is still ignorant of it. People already know whether they want to own gold or not, it's not a tough decision. But, as so many new people have learned about BTC, many of them have decided they should hold Bitcoin for one reason or another.

For example, Cypress has received a lot of news attention for for its banking woes. An undercurrent to this story is how BTC has exploded there and other places in Europe as people learn about it and decide it can be useful for them. And this will encourage other people to want to hold Bitcoin, by exposure.

And as people continue to desire Bitcoin, more business want to cater to a BTC economy, which in turn makes BTC more valuable. The engine churns on.

The whole thing may seem flimsy, and it might be. One panic in the market could send the whole thing tumbling down, but I don't have enough data nor does anyone else to know what will happen. But naysayers have the whole weight of history behind them. Never has anything rose in value like this and maintained its value. (Look up Tulipomania)

But that is the nature of technology, to be disruptive. And as technology advances the level of disruption and the rate of disruption increases. And there is the however small chance that Bitcoin is creating an intense disruption right now and that it might really catch on and it won't crash.

Final Thoughts

I personally am a little worried. I don't want to get sucked into a digital version of the 2008 housing market crash, so I won't accrue any additional Bitcoin for a while. I want to see what happens in the market over the next week or so. It seems likely that Bitcoin might maintain its elevated price and go into homeostasis for a little while, having just gone through a rapid adjustment to its new price.

It all depends on whether the currency is attractive enough to bring people in to replace those that inevitably want to liquidate.


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