Bitcoin: a bubble waiting to burst or boom?

EDGAR investigates the Bitcoin phenomenon, ahead of the virtual currency’s first UAE summit.

November 1, 2014

Jawad Mian breaks into a grin and shakes his head. “No, I don’t think so,” he laughs, when I half-jokingly ask if he’s expecting to be invited as a panelist to Dubai’s inaugural bitcoin summit in December.

“Look, I’m not a bitcoin basher,” explains the 30-year-old financial markets analyst, as we signal a waiter for the cheque and close off a long lunchtime discussion on the cryptocurrency. “I just take a critical view, and right now the sentiment around bitcoin is so positive that people don’t want to hear the other side.”

The other side, according to Mian’s way of thinking, points to a rather bleak conclusion that nobody holding bitcoin really wants to hear or entertain. If you own bitcoin, sell. He is adamant: “Bottom line, it’s a bubble.”

Although bitcoin had been launched four years earlier, it was last year that it really took off. On New Year’s Day, 2013, one bitcoin was worth $13. Come the start of October, bitcoin’s price had steadily risen to around $100. Nine astonishing weeks later it had ballooned to $1150, and ‘To the Moon’ became the tub-thumping battle cry for bitcoin diehards the world over. Bitcoin. “That’s an 89-fold rise,” exclaims Mian, almost in a state of agitation. He goes back to look forward, pointing to Dutch tulip mania in the 1600s; the rise of gold in the 80s; the dot-com crash of 2000. Mian, a deep thinking disciple of economics, finance and history, pauses and stares at me through his Woody Allen style specs. “Bitcoin has seen the most extreme price appreciation of any asset, at any time, ever.”

Since the giddy highs of last year, bitcoin’s price has shed more than half its value, and for the last four months has been in a slow bearish descent, hovering in and around the $500 mark. Mian envisions more pain to come. “Typically, you see bubbles correct 85 percent, so, based on that scenario, you should should see the price of bitcoin collapse further over the next 12-18 months to somewhere around $300.”

Greed and fear, together with herd instinct, comprise the twisted heart and soul of all speculative bubbles. Bitcoin is no different. Enter Alejandro Sánchez, a former professional online poker player turned fulltime bitcoin trader, whose livelihood depends on his ability to gauge the intensity of sentiments at play in the bitcoin market.

Sánchez agrees to meet me in a café in Downtown Dubai, his local neighbourhood and arguably the most prestigious address in the city. We sit and he tells me he is soon moving into a new apartment in the Burj Khalifa, which towers over the Dubai Fountain and the swarm of tourists below, vainly attempting to crowbar themselves, and the 800m silver skyscraper into selfies. Bitcoin. I try, on a number of occasions, and in various guises, to ask how much money he is making, and in particular how well he did during the bitcoin boom of late 2013. Sánchez, a lean Spaniard with short-cropped dark hair, piercing bright blue eyes and a more boyish face than his 25 years suggests, isn’t biting. Good poker players don’t blink.

He does tell me, in a rich Madrid accent, that he’s been trading bitcoin fulltime for almost one year now. “People think I have another job, or that maybe I am joking,” shrugs Sánchez. He has never had a traditional job. “Trading in bitcoin is not like trading stocks,” Sánchez says, leaning forward. He describes the bitcoin market as being particularly prone to the madness of crowds and the kind of price volatility that gives ice cool traders a warm fuzzy feeling inside.

The 5,000 per cent meteoric rise of bitcoin in 2013 made many of these early adopters wildly rich, and spawned an unlikely group of millionaires. The mysterious mastermind behind bitcoin’s open source code, Satoshi Nakamoto, (an anonymous pseudonym), is believed to own around one million bitcoins – a bounty which, at the peak of 2013’s bull run, was worth a staggering $1 billion.

“There are a lot of young kids who own thousands and thousands of bitcoin, and when the price starts to go down they think they are going to lose all their money and they start to panic,” says Sánchez. “That’s when you can make profit.” Bitcoin. Sánchez, a pragmatic man adept at rationalising odds and outcomes, seems largely unconcerned as to whether the price of bitcoin goes up or down. But he is a self-confessed believer in cryptocurrency technology and he wants bitcoin to succeed. Have people missed the boat? “No, it’s not too late,” he counters.

Several high profile bitcoin evangelists, who could hardly be considered impartial, believe a single bitcoin can one day be worth tens of thousands of dollars. I put Sánchez on the spot, asking for a 12-month forecast. “We could see bitcoin go as high as $5,000.” He pauses, before adding glibly: “But it could still fail. It could be zero.”

And that’s part of the problem for the bitcoin neutral. Who or what to believe? On the one hand you’ve got legendary billionaire investor Warren Buffet claiming bitcoin has zero intrinsic value and is a ‘mirage’. And then there’s iconic Silicon Valley venture capitalist Marc Andreessen – a man with a knack for spotting winning trends and technologies – who predicts that bitcoin will be as transformational as the internet itself.

Bitcoin is more than just a digital currency. It’s also a cryptographic technology that enables a peer-to-peer exchange and payment system without the need for a trusted third party. Few pundits question that this revolutionary technology holds great merit and potential power. It’s the value of bitcoin where things get foggy. Bitcoin. Never scared to take a punt on uncertainty, Silicon Valley’s venture capitalists sniff an opportunity and in the first seven months of 2014 have invested $158million in bitcoin companies. That figure is up from $90million last year and $2million in 2012. Growth, for sure, but relative pocket change in the Palo Alto economy.

Mian, who defines his role as solving complex intellectual puzzles to figure out future trends, themes and opportunities, reflects on the political roots of the cryptocurrency. “If you look at the libertarian psychology behind bitcoin, it’s a movement against evil government and bloodsucking banks.

"If you create something that invades the way a government runs the country, which is money, then the government isn’t going to stand still. Technologists have had so much success disrupting music, media and telecoms they feel this is the next wall they’re going to break down. I can understand that psychology. However, I think it’s misplaced because they don’t fully appreciate the history of money, and the way governments run an economy.”

Sánchez walks through a list of potential risks and developments that would likely cause panic and the price of bitcoin to plummet and crash. Chief among them is the idea of central banks developing their own crypto currencies.

Mian agrees, and predicts such an outcome is ultimately inevitable; that governments will move to counter the threat but embrace the technology. “I see bitcoin as the first in a series of innovations in this space,” he concludes. “It’s not the solution or the endgame.”