Bitcoin: Rises and Falls

What a Wild Ride!

Even those individuals who have not dabbled in Bitcoin yet (and now probably wouldn’t be the best time to start, arguably) have heard of the cryptocurrency that essentially invented the concept and became quite popular several years ago.

At the time, Bitcoin, and perhaps even the concept of cryptocurrency, was seen as a fad that would eventually pass. While I did not express that exact opinion in my first WoV article on the subject, it was my tendency to think that the idea of Bitcoin was fairly silly and I didn’t expect it to get taken as seriously as ended up being the case. I’m quite happy with myself that I showed some restraint and didn’t make those opinions public.

While I would go on to ignore Bitcoin for the last several years on WoV, there can be little doubt that it has taken the world by storm as can be seen in the many LCB writings on the subject. Of course, WoV has more of an American focus (with a slight less interest in online gambling) and LCB is quite worldwide, and many casinos that accept Bitcoin promote themselves here, so it stands to reason that the LCB audience would be more interested in BTC.

Even back in 2017, Feelin’ Froggy wrote an article wondering if the Bitcoin bubble was about to burst, and perhaps both of us might have said, “Yes,” had we been asked, but I don’t think either of us necessarily realized how big the bubble would get first!

I’ve recently written another WoV article that has taken a look at the last five years of events related to Bitcoin, but there have been so many writings along those lines here that I see no need to duplicate my efforts, so we will just discuss recent events, but first:

What Exactly is Bitcoin and Where Does it Come From?

Bitcoin is what is known as a cryptocurrency and the way new Bitcoins are derived is that they are, “Mined,” by computers, preferably supercomputers, completing complex mathematical formulas that only a computer could do (quickly) with batches of Bitcoin being released to the first computer that completes the series of problems.

The way that the system works is that the number of BTCs that would ever exist was designed to be finite, and as such, BTC would become harder and harder to mine as time went on. The first individuals to get on the BTC train early had a much easier time mining Bitcoin and many were able to sit back and relax and enjoy watching the prices soar, well, until recently.

Anyway, it requires a very high computational cost to mine Bitcoin, which also means that it requires a ton of electricity. In fact, in terms of electric output, JUST the mining of Bitcoin can rival the electricity use of some small countries, so let’s just say that Bitcoin is considered less than environmentally friendly.

There are other costs associated with mining Bitcoin, as well. In fact, people have to take a direct financial risk as they must be willing to have a computer dedicated to operations and, if they are not going to get a high capacity computer, will also have to separately purchase a graphics card with at least 16GB of RAM, which start at around $300 USD in order to have any real chance of successfully mining BTC.

Once again, all of these computers are in competition with one another and, as I highlighted in the other article, 90% of all Bitcoin that will ever exist already does exist in the marketplace. Inflation has actually hurt Bitcoin, believe it or not, with the main reason being that increased electricity prices make it much more costly to mine, however, the price has been dropping, so it is usually not going to be considered worth mining.

Think of it this way: Imagine that you were in San Francisco during the Gold Rush more than a century ago. Okay, so you spend every day panning for gold at a specific gold deposit, and it was going well for several months, but now you notice that you are coming away with almost nothing every day…and you’re spending even more hours doing it! As if that weren’t bad enough, the price of gold has dropped and is now not even worth half of what it was at its peak.

With that, I ask you: Would you still mine for gold?

I detailed the legal status of Bitcoin across many different countries in the WoV article to which I linked, so feel free to check that out if you want to, but there is no reason to duplicate those efforts here. It’s in the first major section of that article, so it should be pretty easy to find.

Okay, so it would eventually reach the point that mining Bitcoin required more effort, came at a higher cost and then the price dropped like a rock. In investing terms, continued mining is really not going to be justified, unless you think the BTC price is eventually going to shoot up again anyway, as the costs will not be justified by the amount of Bitcoin you end up with.

Besides, you’re still going to be competing against various supercomputers as there are a few different actual companies that devote some of their operations to Bitcoin mining, so someone doing it as an individual is not likely to do all that well.

What is Bitcoin Value Based On

With that, some individuals might wonder what changes the value of Bitcoin. Why was it worth more than double current levels a few months ago, but not now?

I can answer that question with a single word: Perception.

Let me explain:

The trading price of Bitcoin is based on consumer perception of the value of the currency and absolutely nothing else. The initial selling point of the cryptocurrency was that it was not only highly secure, but also could be used outside of what would be normal governmental regulations on currency. Unfortunately, the Governments would do their best to regulate the use of Bitcoin, with a specific focus on those companies who are willing to accept Bitcoin as payment.

The other selling point of Bitcoin was how secure it was, given that BTC is stored in a highly controlled digital instrument called a crypto wallet. However, that security comes at a price. The price is that once you have sent it away or paid for something, that Crypto is gone and, unlike with a credit card, you cannot reverse the transaction if the product sold or service rendered does not come as advertised. In effect, you are completely at the mercy of the entity with whom you are dealing.

For that reason, some merchants, especially online, who accept Bitcoin are shadier than others. Personally, I would tend to only trust those merchants who accept some other form of payment than Bitcoin and, preferably, who also have physical locations somewhere, but that’s just me.

Bitcoin casinos also became wildly popular in the years since the Crypto began to take off. Not only do a great many online gaming outlets both accept deposits and withdrawals in BTC, but there are even a few who deal in BTC (and sometimes other Cryptos) exclusively. In fact, you can find any number of them here.

Personally, I think that Bitcoin is worth exactly nothing, which might sound like a crazy thing to say given that it is trading at $20,712 (USD) per full BTC, as of the time of this writing, but the all-time high for BTC was something like $64,400 USD per BTC unit, so what does that tell you? I had said earlier that the current valuation is not even half of its high point, but I should have said that it is currently not even worth a third of its all time high.

However, you might wonder, “Why does Brandon think it is worth nothing?”

The reason that I think it is worth nothing is because it is only worth whatever someone is willing to pay someone else for it and has no intrinsic value. The fact of the matter is, Bitcoin is not tied to anything like the industrial output or gross domestic product of a country. Granted, most currencies (USD included) are no longer tied to a physical commodity, such as gold, but Bitcoin isn’t tied to anything whatsoever aside from investor perception.

Consider this: Do you have any idea what would happen in the United States if the value of our currency fell by more than two-thirds in a period barely over six months? I guess the first thing for me to say is that the only way that would ever happen would be if a meteor hit the center of the country, or something, so you don’t really have to worry about that.

Anyway, that’s the reason why the currencies of most countries are relatively stable, because the GDP’s of those countries (which highly correlate to the values of the currencies) are at least semi-predictable whilst, once again, Bitcoin is tied to nothing.

Of course, some regulatory bodies see Bitcoin as a commodity, but once again, I have a little bit of an issue with that.

The thing about trading in commodities is that commodities usually remain relatively stable and, during periods of high uncertainty in the stock market, tend to increase in value. For example, if you look at this chart for gold, then you can observe the following things:

Gold dropped slightly leading into The Great Recession (around late-2007 to 2008 and beyond), but as the stock market crumbled, people began to invest in gold as they saw it as a safe commodity to hold their money and get some gains. In fact, gold way outperformed the stock market during the years of the Great Recession and the price didn’t begin to decline until the market came back around, was seen as a better way of getting return on investment, so the demand for gold eventually fell.

The next time that we see is the beginning months of the Covid-19 crisis, during which time Bitcoin and gold actually followed a similar pattern. In both instances, they dipped a little bit with the stock market, but would quickly recover and outpace the stock market in growth until the market finally came roaring back.

In the case of Bitcoin, for example, it’s value in the early stages of the pandemic dropped by nearly half, but it had recovered to pre-pandemic levels (essentially) within two months.

When we compare Bitcoin to the Dow Jones Industrial Average now, what we see is a pattern of consistent, but slow, decline for the broader stock market. Of course, this decline comes with a great many ups and downs. What we see with Bitcoin is that it absolutely cratered after hitting its peak in November, 2021. Since that time, there have been very minor ups and downs, but for Bitcoin to lose more than two-thirds of its value while the stock market declines steadily is a terrible sign for the cryptocurrency.

Essentially, we saw with the two major events of the last fifteen years that gold was seen as a safe investment during tumultuous times with the global stock markets. That should be expected to continue to be the case. 

While it would seem, just judging by 2020, that the same had become true of Bitcoin, the recent total collapse in price would suggest otherwise and should indicate, if someone had to guess, that BTC will not been viewed as a safe asset in the event of another country or global recession.

That’s actually pretty wild since the implication from the events of the year 2000 might lend the impression that BTC was beginning to be seen to be as stable as gold.

Stock Comparison

I don’t understand the reasoning behind the fact that some people look at Bitcoin as a commodity as I almost see it as functioning as some sort of bastardized hybrid of a currency and a stock.

Of course, if Bitcoin were a stock, it would be a Penny Stock of some shell company that exists in name only because, I will reiterate, Bitcoin has zero fundamental value.

Okay, so what do I mean by fundamental value?

If we look at stock for a company that actually has locations, then basically what you have is a company that can have a net negative expected final value if they go out of business (and many do when the file bankruptcy and common shareholders get nothing in the end), but the fact remains that the company does own some stuff with fundamental cash value.

For example, whatever inventory that the company has on hand, even if they announce that they are going out of business, can certainly be sold for something. Most companies will own physical locations, which themselves can eventually be sold for something. Many large companies have their own investments and loans that they have made, even when the fundamental business is not to be a financial institution, so those things can be sold for value.

Beyond that, companies will also have rights to their own trademarks and patents, which can eventually be sold. For example, Craftsman was once a brand of tools that became wildly popular, but the trademark was owned by Sears Corporation, so only Sears (and whoever they licensed to do so) could sell that brand of tools. Prior to them filing bankruptcy, Sears sold licensed out the rights to Craftsman which was one of the last things left about that iteration of Sears Corporation that still had any meaningful value. They did the same thing with their Kenmore brand of appliances.

Beyond that, there are occasions in which companies have value with even less tangible things. For example, most land casinos in the United States, and some abroad, will maintain a list of their guests and players club card holders for marketing reasons. These casinos will also have data on what guests spend the most money and who plays the most in a day (expected loss) during an average visit. Needless to say, other casino companies would pay fortunes for the lists of their competitors. Of course, that data is typically not going to be for sale unless the company either sells that casino to another casino company or goes out of business.

For that reason, when looking at the valuation of a company, all of those things are put into consideration. In fact, when it comes to the data-related stuff, some companies even have a line item for that sort of, “Intellectual property,” as an asset and, as best as they can, try to put a hard cash value on that.

For all of these reasons, many companies could close their doors today and, after sorting out all of their affairs, would have positive cash that would be distributed amongst shareholders, with even some common shareholders getting some.

Of course, that’s not the case with the vast majority of corporations, as most of them would be underwater if they suddenly ceased to operate. That’s why the stock price is largely forward-looking perceived value, much like Bitcoin, but in the case of the stock market, it is the prospect of future earnings that is priced in.

The stock market concept of market cap, short for market capitalization, is simply the value that is implied a corporation has, in total, which is based only on the price per share multiplied by the number of outstanding shares. Interestingly enough, BTC, which once again is backed by exactly nothing, would be one of the fifteen largest companies in the entire world, by market cap, if it was considered a company.

Isn’t that an amazing implication!? The current amount of BItcoin in the world, by implied value, is worth more than the largest physical retailer in the United States (which also has locations in some other countries), Wal*Mart.

Of course, some of you out there probably think that is totally insane, and I can assure you that I agree with you 100%. I can’t emphasize enough that Bitcoin is not tied to anything, there’s nothing backing it, and the only thing that keeps Bitcoin prices where they are right now is the fact that enough people perceive it as being worth, presently, around $20,000 USD per Bitcoin.

In essence, all it would take for BTC to drop to $10,000 USD per BTC would be for enough people to think that it’s only worth $10,000 BTC instead and to refuse to buy BTC for anything more than that. Of course, the BTC price can theoretically remain constant as long as people only use BTC as a medium of currency (to pay for goods and services) and discontinue buying and selling BTC from one another. In point, if nobody bought or sold BTC directly, then just like a stock price, the value would remain the same as whatever the last price per share was on the most recent trade.

Of course, some people are going to continue to play the Bitcoin market.

The Market and Bag Holders

Okay, some of you who are unfamiliar with trading terms might be wondering what it means to be a bag holder. Traditionally, it’s a stock investment term that is meant to describe someone who holds onto a stock until it is completely worthless because they did not want to sell for less than they bought it for.

Believe it or not, stock bagholders tend not to be completely delusional. The majority of them realize, even whilst they are holding the bag, that the price of the stock in question is almost certainly never going to recover, but, they reason, that if they give up and sell the stock then they DEFINITELY take a loss while they only MIGHT take a loss if they hold onto it.

With that, I imagine that there are a great many people who jumped on Bitcoin during one of the several major pops in price per BTC that it enjoyed.

In fact, with exception to a few small drops, the price per unit of BTC did nothing but increase throughout the first several years of its existence. While there were a couple of significant drops in price, especially from 2020-2021, BTC would usually recover any losses in value per unit and then some. Because of this, some might have started to see it as being extremely price stable.

That would remain true until starting around February of 2021, when during the latter part of that month BTC hit its then-peak of about $56,000 USD, only to be followed by a significant drop.

Of course, if that significant drop could be seen as having tested the crypto, then the crypto passed that test with flying colors as it would soar to a new high of more than $61,000 USD per BTC in the first half of March 2021. For the next two months, BTC would experience a bunch of quick ups and downs, though the price would usually gravitate somewhere in the $50,000-$60,000 range.

However, at some point in May of 2021, the price of BTC would crater sharply and, during the months of June-August of that year, would generally be anywhere from $32,000-$48,000 per unit, hitting the bottom in July and then recovering somewhat as the year went on.

Compared to most stocks individually, at least for major companies, and especially compared to the stock market as a whole…the volatility of Bitcoin was insane during this period of time. Anything that is even remotely stable, outside of a broader economic recession (which there wasn’t during this time) should not fluctuate by nearly half of its starting value. Certainly, the affairs with Russia and Ukraine had something to do with that, as well as the increasing price to mine BTC, but BTC even seemed to ignore the increasing costs of electricity in that initial recovery.

BTC would be relatively stable during the rest of September, but would soar again between the months of October and November 2021 before eventually reaching its highest price point ever of roughly $64,400 USD a price which, as we have mentioned, is more than triple BTCs current value as of the time of this writing.

Once again, these fluctuations do not reflect what can be expected of a stable investment. In fact, this is nowhere near stable and the trading and price pattern (in terms of chart, not amounts, obviously) looks like the chart for a penny stock that is highly manipulated!

BTC would sharply decline towards the end of the year spending most of December 2021 somewhere in the $60,000 USD per BTC range before closing out the year a little bit under $50,000 USD per unit.

BTC would spend the first few months of this year (2022) in a comparatively stable price point ranging from $40,000-$50,000, it briefly dipped below $40,000 for a few days in March of 2022, but would quickly recover and would eventually see its highest price point for the last few months prior, being valued at nearly $46,000 USD per BTC unit on April 1st 2022.

What would follow, after a few days of steady declines, can only be described as a total collapse. The bubble got huge and the huge bubble burst, but as it would seem to appear, there was also a bubble inside of that bubble with the smaller bubble having recently burst and Bitcoin currently being valued at less than a third of its all-time high, as well as less than half of its April 2022 value, which is an absolute cratering considering that was just two short months ago.

Bitcoin reached a yearly low of below $19,000 USD per BTC just a few weeks ago, but has since recovered and seems to have somewhat stabilized right around $20,000, give or take about $1,000 (which is still crazy in terms of daily fluctuation) for the last two weeks or so.

Anyway, there are certainly some people who bought Bitcoin at any one of these high points and are either using it in normal transactions with merchants, or alternatively, are holding onto it waiting for the price to recover.

For that reason, as a currency, I tend to think that Bitcoin sucks. My personal opinion is, if you use Bitcoin (especially with the recent drastic and sharp price fluctuations) for online gambling, then you are gambling twice. You are first depositing into the casino hoping to improve your balance, and then secondly, you are hoping that Bitcoin either increases in price or stays relatively the same by the time you go to cash out.

Naturally, there are some fluctuations in the spending power of a given unit of currency that is backed by an individual country, such as U.S. dollars. It’s for that reason that there are currency trading markets and the amount of one currency that can be exchanged for another changes on an almost every minute basis. That being said, however, the most stable currencies (of which USD and Euros are pretty good examples) certainly do not lose 50% of their spending power over the course of two months, again, barring absolute catastrophe.

By that standard, BTC suffered an absolute catastrophe. Although, I find that somewhat less surprising than if an actual currency backed by a country did the same as, once again, I believe that BTC has exactly nothing in the way of fundamental value. The only value it really has is decided by mutual agreement on how much one person is willing to spend to acquire whatever decimal amount of BTC from another person, as exchanges involving full Bitcoins, or multiple full BItcoins, tend to be somewhat rare.

Of course, many people first got into Bitcoin at one of these highest levels, probably under the assumption that it would continue to increase in value and likely find themselves quite shellshocked by, not only the current price, but also by the number of investment articles that suggest that they should sell at this price, rather than hold, with many such outlets predicting that BTC will eventually fall to a price of less than $10,000 USD per BTC, and perhaps even lower than that.

Of course, compared to 2017, that would still be an impressive price as my first WoV article on this subject, from 2017, was written at right about the time that Bitcoin became valued at more than $2,000 USD for the first time. Relative to that point, Bitcoin purchased then would be worth 1000% or more than you bought it for, now, and even a price of $10,000 USD per BTC would still reflect a 500%+ increase, or roughly so.

Of course, that almost certainly doesn’t make the people who bought and held at $40,000+ feel any better.

Unfortunately, I cannot really offer any advice as to whether or not you should sell Bitcoin at this time for two very simple reasons. The first of those reasons is that I usually make investing predictions and decisions based on fundamentals, but as I keep saying, Bitcoin has no fundamental value that I can come up with. The second reason is because I cannot predict what Bitcoin will do in the future because, not only is it ridiculously volatile, but never in a million years would I have predicted that it would hit some of the price points that it already has. Back in 2017, you could have knocked me over with a feather if someone from the future were to come and tell me that BTC would EVER be worth $20,000 USD per unit, even more so if that same person were to tell me that reflects a price that is less than one-third of BTCs all-time high price.

Perhaps you will only trust me on this question of fundamental value if you read it from an educational source, so here you go, quoting, in part:

While Bitcoin has failed in its stated objectives, it has become a speculative investment. This is puzzling. It has no intrinsic value and is not backed by anything. Bitcoin devotees will tell you that, like gold, its value comes from its scarcity—Bitcoin’s computer algorithm mandates a fixed cap of 21 million digital coins (nearly 19 million have been created so far). But scarcity by itself can hardly be a source of value. Bitcoin investors seem to be relying on the greater fool theory—all you need to profit from an investment is to find someone willing to buy the asset at an even higher price.

The article also mentions what I said earlier that one of the early purposes of Bitcoin was to engage in transactions without any government oversight or regulation, but since Bitcoin’s origination, a great many countries have begun to regulate it and have even become adept at tracking large unreported transactions that are done either for illegal purchases, or alternatively, to avoid the reporting of income. It also suggests that BTC is not as safe or as anonymous as it once was, and also that the processing fees for transactions are extremely high, but I must admit to not knowing much about either of those two things as I have never really used Bitcoin and certainly have never invested in it.

Conclusion

In conclusion, I’m afraid that I can still offer no predictions on what I think the price of BTC will do in the future because, not only do I think it has no fundamental value to begin with, but at no point would I have ever guessed that it would be worth as much as it is today.

With that said, I would strongly encourage those who are still holding Bitcoin as an investment to do as much homework as possible and try to determine, using as much objectivity as possible, whether they think the price will go up or down and hold, sell or buy accordingly.

I should disclaim that, while I base decisions and predictions largely on fundamental value, my thinking is otherwise more similar to that of a trader rather than an investor. However, one fundamental concept that I look at as a trader is this, “Holding something at a current price is the same thing as buying.” Most investors would disagree with that outlook, and rightly so because investing philosophy is totally different, but my trading philosophy is that there is no reason to hold something (as opposed to selling it) unless you would at least consider buying it (or more of it) at the current price if you weren’t already holding.

In the case of BTC, rather than hold onto it with the hope that it will massively increase in value again, especially if you don’t objectively think such a thing will happen, then you should consider selling and getting out of it. If you think the prices will continue to fall in the short-term, medium-term or long-term, and especially if the possibility of another huge drop (the volatility of BTC has proven to be ridiculous) alarms you, then the safest play might be to get out.

On the other hand, maybe it will eclipse $40,000 USD per BTC, or perhaps even $50,000, $60,000 or $70,000…if the last several years have proven anything about BTC it is that it’s a really tough thing to predict, which, for me, is by itself enough reason to stay away from it.