Much as already been written about the steep rise in Bitcoin’s value, particularly over the last few months and as it approaches $10,000 per BTC. This article aims to look at some of the broader issues behind the headlines. To any one who has been through a few bubbles the most striking feature of the current market is the parabolic price graph. Anyone familiar with this pattern will know that is usually ends badly. In this case we are in new territory with digital currencies, but this market is being driven by the same human fear / greed emotions that govern all markets.
With BTC we are operating in a near perfect market with multiple exchanges, low trading friction, and constrained supply. Bitcoin’s inventor Nakamoto set a monetary policy based on artificial scarcity at bitcoin’s inception that there would only ever be 21 million bitcoins in total. Their numbers are being released roughly every ten minutes and the rate at which they are generated would drop by half every four years until all were in circulation. As shown on the graph below, we are now at 16.7 million issued bitcoins leaving 4.3 million yet to be mined.
Looking at the internals of the Bitcoin market over the last 6 months, around 5 million BTC are traded every month or 160k BTC a day, with no discernible acceleration in overall unit volume but clearly the value of each unit traded is rising fast. However, the number of trades per minute has been rising from a weekly average of 267 to the current 395, a near 50% rise in the number of trades over a 6-month period. The currency has been designed such that new BTC can be “mined” up to the limit of 21 million with increasing difficulty as time goes by. At inception around 6,000 BTC were created each day vs the current rate of just under 2,000 BTC so it will take a minimum of a further 70 months to reach 21 million. Turning to trading volume in USD, the following chart shows a steadily increasing trend until November this year when trading volume doubled and has then fallen back to trend in the last few days. The current trading volume is around $ 500 million a day or 1% of issued BTC a day. Current BTC market cap is $ 166 billion about half the total crypto currency market of $300 billion, about the same market value as Bank of America, the 10th largest company in the S&P 500.
The world’s second-largest crypto currency, Ethereum, has a current market capitalisation of $46 billion and is currently trading at about $475, representing a price increase of more than 25% in the past week. As with bitcoin, Ethereum also hit a new all-time high over the weekend. Currently there are 1,327 crypto currencies in curculation but the top 10 account for 87.5% of the market by value.
In summary, with BTC we have an efficient market with no supply shocks but no underlying value other than limited supply the willingness of another person to purchase. Should the BTC market implode the question is: will it impact the real economy? Clearly companies such as Nvidia will be hit (NVDA up 50% in the last 6 months) and the removal of a potential $330 billion from the global market is not insignificant. It has to be assumed that crypto currency ownership is highly dispersed and largely outside the global banking and equity systems giving it limited scope of damage. Hopefully this large unregulated currency market is still within the watch of central banks and has not leaked into the banking system through derivatives. Relative to the global FOREX market, BTC in a drop in the ocean.