Quick Take: A Bitcoin Bubble? Not Yet

When you take a look at a chart like this...

...it should inspire fear as well as awe. Parabolic rises like this are, in most cases, unsustainable. Bitcoin's rise, a 178% gain in just the past two months, should be a stark reminder why investors should always be looking forward instead of back. It can be awfully tempting to want to jump on board before the parabolic rise continues higher but ask anybody who loaded up on tech stocks at the peak of the bubble how that can sometimes work out.

In the case of bitcoin, it's a nascent technology still used mostly as a speculative vehicle as opposed to an actual currency but it continues to creep ever closer to everyday relevancy. Its rapid rise this year is reflective of that but it's still unclear if the cryptocurrency's price has moved too far too fast. Is it overvalued? Yes. Is it in bubble territory? I don't think so.

The biggest reason for the rise in bitcoin is the actions of Japan and, more recently, South Korea. An amendment to Japan's Banking Act now recognizes bitcoin and other virtual currencies as a means of payment driving up demand in one of the world's larger economies. South Korea is similarly becoming quicker to accept cryptocurrencies by lowering capital requirements for bitcoin companies.

The other big reason I think there isn't a bitcoin bubble is that there's no real way to assess what its fair value should be. With companies, you can look at financial statements and say that if a stock's price relative to its earnings or sales or cash flows is above average then it's expensive. With bitcoin, it's really just a matter of what price is someone willing to pay. $2400 for one bitcoin seems high today, but if it gains mainstream acceptance and becomes just as common as cash or credit cards in the next "X" number of years, that price may seem extraordinarily cheap.

So I maintain my stance that bitcoin is overvalued in the short-term and may be due for a bit of a contraction. Taking a longer-term perspective, I don't see a lot of evidence yet that bitcoin's price is in the completely unreasonable area.

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