Bitcoin is on fire: From a recent low of $3,226 on September 14, prices pushed over the $17,000 level on Thursday, an incredible gain of more than 400% in less than three months.
Data circulating the Twittersphere says the rise from $7,000 to $8,000 took 14 days. The rise from $11,000 to $12,000 took six days. The rise from $12,000 to $13,000 took 17 hours. The rise over $14,000 took just four hours. Over the last 24 hours, things have gone vertical.
But when my wife's hairdresser touts her bitcoin winnings, getting in on the action over Thanksgiving despite not fully understanding what it is, I can't help but think the end (of the beginning) is near, clearing the way for a more mature integration of blockchain technology into the banking system.
Is it a bubble?
The consensus seems to be "Yes, but the technology will last" with parallels to the 2000 tech meltup. Sure, Pets.com isn't around anymore. But Amazon CEO Jeff Bezos is now the world's richest man.
Excitement seems to stem from word institutional investors are on the verge of joining in, with the Chicago Mercantile Exchange and the Chicago Board Options Exchange both reportedly planning to start trading in bitcoin futures later this month.
Yet, I fear a nasty end for many late arrivers. As prices rise and present a growing risk to financial system stability—potentially catching unsophisticated investors in the whirlwind—officials are growing nervous.
South Korea's Prime Minister fears "serious pathological phenomena," while the United Kingdom plans a crackdown by forcing users to disclose their identities. Russia and China have already leaned against the trend. And in the US, the IRS won a case against Coinbase—a popular crypto exchange—to disclose user information amid a wide gap between the number of bitcoin traders and the number reporting gains for tax purposes.
Wall Street banks are concerned bitcoin futures could undermine the stability of exchanges they have counterparty exposure to. And some retailers are balking, with computer game platform Steam no longer accepting bitcoin as payment.
What will pop the bubble?
The specter of fraud remains, and there's no legal recourse because of the anonymous, decentralized nature of the beast. The irony: "It's not a bug, it's a feature" that bitcoin is so easily swiped by hackers, whether it's Mt. Gox or the $31 million hack of the Tether Treasury in November or Wednesday's $62 million hack of NiceHash.
Could these vulnerabilities—to cyber-theft and a regulatory crackdown—be what ultimately pops this bubble?
Moreover, there are issues with bitcoin's "application layer" making it unsuitable for small transactions because of processing delays; a far cry from the speedy response of existing card processors like Visa.
This is the reason behind the "hard fork" with Bitcoin Cash, the rise of alternatives like Ethereum, and ongoing efforts to make bitcoin a more efficient means of wealth transfer, which, after all, was its original intended purpose—not as a speculative power-hungry asset. Web 2.0 titans like PayPal and Square are also making a strong case for easy digital transfers and remittances from within the traditional financial system.
The competition is heating up, with the rise of Apple Pay's messaging functionality and services like Venmo moving "cash" into the digital age. Plus, since these are backed by the dollar (which is legal tender), there are no tax implications. Every bitcoin transaction, on the other hand, carries a taxable gain or loss.
The bulls have a strong case...
...mainly, that bitcoin has built-in scarcity with the supply never able to exceed the predetermined cap of 21 million, with mining difficulty scaling as needed to keep the creation of new coins constant through time—the antithesis of this era of aggressive fiat-based cheap money stimulus. Tax avoidance has also played a role, for better or worse, as has the ability to skirt oversight for less-than-legal activities. And it has first-mover advantage in the cryptocurrency space, lending liquidity and marketing benefits other coins don't enjoy.
According to Michael Oliver of Momentum Structural Analysis, while this clearly is a "bubble that will pop at some point, flushing out the speculators" there are parallels with the rise of the internet, which allowed information to cross borders without regard to governments.
Eventually, regulators moved in. For example, China's internet usage is now closely controlled. And the debate over "net neutrality" is raging here in the US. Oliver expects similar action by central banks threatened by the rise of cryptocurrencies. Prices will tumble. Paper fortunes will be lost.
In the aftermath, the cryptocurrency market "will dust itself off and proceed in a more mature manner," as happened in the wake of the dot-com blow up. The focus will shift away from using bitcoin to get rich overnight and instead using the technology as a less frictional, more secure means of exchanging wealth around the world that doesn't rely on governments for trust.