Yep, $50,000. That’s the price Bitcoin reached tonight. It’s fantastic, crazy — and raises questions: Why? Why? And are we only at the beginning of this bubble — or already at its end?
A picture is worth a thousand words, and a number is often worth a hundred pictures. So I’ll put the number of the day here once again:
That’s how much a Bitcoin is worth by now. So about a year’s salary of a moderately paid editor or a Tesla Model 3. Crazy. We honestly didn’t expect that here. At least not seriously, and not this fast.
More surreal than what’s on the exchanges is what’s not: you still can’t buy and hold Bitcoin at your bank. You still can’t pay with Bitcoin at Aldi or Amazon. There is still no Bitcoin ETF, and it is still the exception for insurance companies, pension funds, and asset managers to put money into Bitcoin. In my environment, no more people own Bitcoins than they did two years ago. At the same time, Germans are saving more than ever; last year, they set aside 393 billion euros, bringing the country’s savings to 7.1 trillion euros.
General interest has increased significantly — but is still rather marginal. So who or what is driving the price up? What is causing this eerie, surreal, seemingly unshakable rise?
One possible explanation would be a FOMO effect among tech companies. FOMO means “Fear of Missing out,” which could be translated as gate-crashing panic. At the latest, since Tesla put a lot of money into Bitcoin, it may have become a trend among U.S. tech companies to at least think about putting some of their ample cash reserves into Bitcoin. And those who are late will be the least likely to have Bitcoins. Therefore, half of Silicon Valley might be in the process of exchanging some of its liquid assets for Bitcoins. That should take a while and create a steady influx of new capital.
Not much less surreal is what is happening in the monetary system outside of Bitcoin: U.S. President Joe Biden wants to pump another $1.9 trillion — 1.6 trillion euros — into the U.S. economy to, of course, alleviate the economic devastation caused by Corona. And in Europe, it is beginning to sink in that trivial logic does not suspend even during a pandemic: Throw more money at an economy that isn’t growing, and prices go up. After the ECB increased its Corona bailout to 1.85 trillion euros in December, and after deflation was still stated in late summer, everyone is now expecting inflation. For example, Bundesbank President Weidmann expects prices to rise by three percent this year, and ZEIT writer Mark Schieritz, known as an opponent of bitcoin, gold, and anything that preserves value, is delighted. That people are “having to deal with the issue of inflation again.”
So governments in America and Europe are pouring money into the market in hopes of not only boosting stock prices but also forcing economic growth. However, the market doesn’t quite know what to do with the money; it’s beginning to dawn that leaving it in the bank account will only destroy values. But what is the alternative?
The real estate market already looks overheated anyway: yields for buyers are shrinking, time frames to recoup the investment are increasing, and perceived prices in many areas have more than doubled since 2017. Stocks are also already at an all-time high, which is all the more paradoxical given that the economy has contracted over the past year. Many companies have gone on short-time work, and there is still the threat of a severe slump in the economy if the retail and restaurant sectors’ problems end in bankruptcies.
These classic investments are only desirable if one assumes massive double-digit inflation rates. But the money has to go somewhere. Therefore, at least if you, like the wealthy and corporations, already have a lot of money parked in stocks, bonds, cash, and real estate, Bitcoin is a good choice. Instead of more of the same, you might as well try something new.
Something similar is true for bitcoin holders. As appealing as it would be to cash out at these prices to realize the astronomical gains — the alternatives are not that appealing. As a result, there is little selling pressure as of yet.
Under these circumstances, the surreal power of scarcity is revealed. So far, only a few companies have seriously invested money in Bitcoins. From the Dax at most, I estimate, but more likely none, from the American S&P Index maybe a small handful, if any. As I said, banks do not offer their customers to buy Bitcoins the way they offer real estate, stocks, savings bonds, and often gold. And insurance companies, pension funds, and central banks, as I said, need not even be mentioned. And yet, the few investments are already driving Bitcoin so far up.
Real scarcity is just powerful. Bitcoin is the scarcest commodity of all time, or, rather, the scarcest fungible commodity that has established itself as a store of value. No comparable commodity is so clearly limited in quantity. By simply holding Bitcoins on their own wallets, companies like Microstrategy or funds like Grayscale or hundreds of thousands of Hodlers around the world are draining liquidity from exchanges. There are not enough Bitcoins to buy, and unlike any other commodity, the market cannot scale up production when demand outstrips supply. Even gold can be pulled out of the ground in higher quantities if only it pays; housing can be redeveloped, as is currently happening en masse. But bitcoins? They are created at the same rate, 6.25 BTC every ten minutes, no matter the price, and no matter how much money miners stuff into their Asic farms.
In that sense, the story has only just begun. Bitcoin’s scarcity looks overwhelming even before the world has really started to use Bitcoin widely as a store of value. What happens when the world starts using it? The dragon has awakened with a rumble but has so far only waved one wing wearily. But of course, there’s no guarantee that it will actually fly.
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