Alex (not his real name) says he’s been suffering from insomnia over the past few days. “The amounts are so large, my base instinct is telling me if I hold on, I’ll double my money. But I’m also constantly fighting with the idea that I should cash out, take my winnings.”
Alex, a Toronto-based lawyer in his 30s, is of course referring to the stupendous trajectory of bitcoin, which went from being worth $700 just a year ago to almost $10,000 today. In the month of November alone, bitcoin’s value surged by almost $4,000 — no other asset or investment product has ever seen a rise of this magnitude, in such a short amount of time.
Bitcoin’s market capitalization is now at a staggering $165 billion, prompting some to speculate that cryptocurrency overall could become a trillion-dollar market in no time.
But one could argue that the fundamentals driving the irrational gain of this eight-year-old cryptocurrency are at best, weak. Bitcoin’s intended role as a substitute to paper currency hasn’t been very successful due largely to the lengthy time it takes to process a bitcoin transaction — hours, or even days, depending on its transaction capacity, which is relatively scarce.
You could speed up a transaction, but that would cost you an extra fee — at times, 10 percent of the amount you’re trying to transfer, which, given today’s prices, simply don’t make sense for the average retail investor.
“I bought a coffee at a London cafe for 3 pounds, and I had to wait 2 hours to get it confirmed, and that was back in 2014 when there were fewer transactions” Yael Ossowski, a bitcoin investor and Deputy Director at the Consumer Choice Center, an international think-tank, told VICE Money.
Ossowski calls cryptocurrencies an “experiment,” and the bitcoin bubble “investor craziness”.
“The 21st-century version has welcomed a plethora of slick consultants, hazy schemes dressed up as investor possibilities, and too much wishy-washy language for anything to really make sense to anyone who wants to use a digital currency to make purchases,” he argued in a scathing Huffington Post op-ed.
Alex, for his part, is acutely aware of what bitcoin used to be, and what it has morphed into. When he invested $10,000 in buying bitcoin back in 2013, he had a sense that there was a significant chance it would capture the imagination of people, not only because of its libertarian, anti-establishment origins, but because it was seen as a finite store of value, much like gold.
“I looked at it as an investment opportunity. I did anticipate losing most of it, but I also thought let me do this just in case this explodes, and I had a gut feeling that it would,” he said.
Alex says he is now sitting on more than a million dollars, and mulling over his next move. If indeed there is no inherent value in bitcoin as he believes, then the current valuation is almost exclusively based on hype — what the masses are willing to pay for it.
“What I’ve decided for now, is to cash out partially. On the one hand, just because it’s a bubble doesn’t mean it’s going to pop. On the other hand it might severely pop around the $10,000 mark and that could be a psychological number for people,” Alex told VICE Money.
One of the most closely followed traders on Wall Street, Art Cashin, told CNBC this week that bitcoin has reached “parabolic levels, and that usually doesn’t end well.” But that very same day, hedge fund behemoth Mike Novogratz, of Fortress Investment Group fame, told the business channel that bitcoin could easily reach $40,000 by the end of 2018, simply because there is no “supply response,” meaning that since there are only a finite number of bitcoin, soaring demand leads to exaggerated prices.
“See, even the best people in the business don’t really know what’s going on. No one has much information, so I would caution the average investor from getting into bitcoin,” Ossowski told VICE Money.
One thing that’s certain — bitcoin, on its present course, is an extremely perilous, yet irresistible cash cow.
“I invested a four-digit amount in August and I’m sitting on a 450 percent profit as of Monday, November 27th,” said Daniel Jo, a 24-year old who’s completing his final year of an economics degree at the University of Calgary.
Jo told VICE Money that bitcoin is a long-term investment — he’s even banking on it as a downpayment for a house one day. He admits that his technical understanding of the cryptocurrency is limited but he simply doesn’t see a reason why he should pull out his investment just yet.
“I am a little worried, but bitcoin has proven itself to be resilient. I can’t say it is a bubble since we don’t know the intrinsic value of bitcoin,” he said.
One of the foremost valuation experts in the world, New York University’s Aswath Damodaran, is convinced that bitcoin is just a dangerous pricing game, because it hasn’t yet proved its usability as a currency.
“The question that you would need to address, is if you’re paying $2,775 for a bitcoin, is whether you can (or even will be able to) buy $2,775 worth of goods and services with that bitcoin,” Damodaran told CNBC back in August.
But for some people, like Alex, the wild west of bitcoin is exactly why they are investing in it — fundamentals be damned.
“It’s an irrational, pathological, animalistic greed,” he said. “I want to make more millions and there is no other investment in the world that can get me there.”