Gu Yanxi: Is Bitcoin the mother of all bubbles?

Recently, Michael Hartnett, chief investment strategist at Bank of America, believed that the recent rapid rise in Bitcoin prices is faster than the rise of other asset bubbles in the past few decades. These other assets include gold in the 1970s, Japanese stocks in the 1980s, the Thai stock market in the mid-1990s, the Internet bubble in the late 1990s, and the US real estate in the mid-2000s. These bubbles all experienced growth of more than 100%, but then collapsed. Michael Hartnett did not explicitly say that Bitcoin will collapse, but he believes that Bitcoin looks like the mother of all bubbles.

In addition to the research view of Bank of America, there are also other mainstream financial institutions that believe that Bitcoin is a highly speculative product. A chart circulating on the Internet shows that the growth rate of Bitcoin is much higher than the growth rate of other assets. But I think that such a simple analogy is not comprehensive and is actually very misleading.

I think it is not appropriate to compare these assets in one chart. One of the main differences is the different amounts of money circulating in the market at different historical periods. The amount of dollars circulating in the market now far exceeds any period in history. This fundamentally leads to the fundamental difference between current asset pricing and historical asset pricing. Therefore, from this perspective, it is more appropriate to compare the rapid growth of Bitcoin with the rapid growth of Tesla. Some views in the market now believe that both Bitcoin and Tesla are bubbles. This comparison has a more appropriate basis for comparison.

From the above chart, we can see the trends of Bitcoin, Tesla and the S&P index in the past two years. Tesla's price growth far exceeds the S&P index, while Bitcoin's price growth far exceeds Tesla's growth. Although both have achieved rapid growth in a short period of time, their price bases are completely different. Tesla needs to ensure that its revenue every quarter can meet investors' expectations. The continued growth of Tesla's revenue every quarter is the pricing basis of its equity, because the market determines Tesla's stock price by discounting future revenue. But Bitcoin is different. Bitcoin itself is its value. Bitcoin has tool-type properties. It can be used as a value storage and transfer tool, but its value is completely given by the market. Its pricing mechanism is more similar to the pricing mechanism of art. The size of this value depends entirely on how much the market recognizes it. Therefore, if Tesla's revenue growth does not meet expectations, then its stock price will definitely go down, that is, the price bubble will burst. But the total amount of 21 million Bitcoins will never change, and it has always been like this. Its value is completely given by the market. As we can see from the above chart, it is obvious that the market's recognition of Bitcoin's value is getting stronger and stronger.

In the past two years, the users who invest in Bitcoin have begun to develop from retail users to institutional users. But even today, there are very few institutional users who participate in buying, selling and holding Bitcoin. But as a regular stock, Tesla is purchased by both retail and institutional customers. And the main traders of Tesla stocks should be institutional customers. As we all know, the vast majority of funds in the market are in the hands of institutions. So in terms of available funds, I think Bitcoin still has a very large long-term growth space. At this stage, in the eyes of mainstream financial institutions, Bitcoin is still either a useless speculative tool or a highly speculative asset, so these institutions will not invest their assets in Bitcoin. Those who hold these opposing views include Barclays, Bank of America, Wells Fargo, Italian bank UniCredit and UBS (see my article "Will Bitcoin go to zero as UBS thinks?"). Their publicly expressed views are actually very representative. Therefore, it can be said that mainstream financial institutions still do not recognize Bitcoin as an investable product. So will Bitcoin go down from its current price? I think it is unlikely.

Speculation plays a major role in any trading product, whether it is Bitcoin or conventional securities products. And the change in the direction of speculative power will lead to a change in the direction of prices. For Bitcoin, the proportion of speculative funds is much higher than that of conventional securities. In addition, due to the high leverage ratio in Bitcoin derivatives trading, this will also lead to a large fluctuation in Bitcoin prices. Therefore, it is very likely that Bitcoin will fluctuate in the future. However, it is also a fact that the market has increasingly recognized Bitcoin in the past two years. Such recognition is also expressed through funds, that is, the amount of funds flowing into Bitcoin is increasing. And the number of long-term holders is also increasing. Such investment decisions are different from the judgment of mainstream financial institutions. Therefore, these inflows can be considered to be unaffected by the negative judgment of mainstream financial institutions. So in the future, will these financial institutions with negative views invest their funds in Bitcoin? I think this possibility is increasing.

The creation of Bitcoin was proposed by Satoshi Nakamoto because he was dissatisfied with the existing currency generation and circulation mechanism. It emerged as a product that competes with existing legal tender. Its product design is fundamentally different from that of legal tender, so in terms of meeting the needs of value storage and value transfer in the market, Bitcoin forms a differentiated competition with legal tender. Therefore, if there is a problem with the circulation of existing legal tender, then Bitcoin will definitely be welcomed by the market. So now we see that in areas where legal tender has problems, such as Venezuela, Lebanon and Argentina, the local demand for Bitcoin will definitely increase. This causal relationship also applies globally. Recently, the general view in the US market has been to regard Bitcoin as a tool to hedge against the over-issuance of the US dollar (see my article "Bitcoin is the biggest competitor of the US dollar"). Therefore, more and more funds will flow into Bitcoin. This inflow trend will not change in the future.

The new U.S. government's financial regulatory stance will be more supportive of Bitcoin, which will further promote Bitcoin to become a mainstream asset type (see my article "Bitcoin ETF application is a question that the new SEC chairman needs to answer immediately"). Therefore, it will be more conducive to the inflow of institutional funds into Bitcoin. Therefore, Bitcoin still has a lot of room for growth in the future. This is why many people in the market have very optimistic expectations for the future rise in Bitcoin prices (see my article "What does Bitcoin's 'compliance premium' indicate?"). And these predictions come from mainstream financial institutions such as Citibank and JPMorgan Chase. In the market, the sharp increase in stocks involved in Bitcoin business also shows that Bitcoin has a lot of room for growth. For example, the price of PayPal and MicroStrategy has increased significantly after providing Bitcoin trading services or purchasing Bitcoin, and the trading premium of Grayscale Trust. These are all concrete manifestations of the beginning recognition of Bitcoin by U.S. institutional users. Therefore, I believe that more funds controlled by institutions will flow into Bitcoin in the future.