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Referencing “Greater fool theory” and uttering terms like irrational or tulipmania in the context of Bitcoin’s amazing run is not entirely wrong. Nevertheless it might be a great example of shallow criticism missing the broader picture.

The price of Bitcoin is heading from All-time High to All-time High and it is doing so at an astonishingly fast pace. The ones who have been calling Bitcoin a bubble ever since, get ever more convinced as Bitcoin relentlessly rises in price day by day. But also many, who have put some money into Bitcoin themselves start worrying about its fast and continuous price rise.

For some, we want to call them “the crypto doomsayer Bitcoin critics”, Bitcoin has really no value at all. Contrary to stocks, bonds or commodities, it is pretty much impossible to evaluate Bitcoin’s fair value because no inner value can be made out, so these critics say. Hence, Bitcoin’s price rise is completely irrational in their eyes and a guaranteed setup for failure.

For others, we might call them “the crypto enthusiastic Bitcoin skeptics”, Bitcoin does have value. Nevertheless they state, that the current price has gotten way out of proportion when relating it to the actual value of Bitcoin. Because in their view Bitcoin’s actual value is rooted in the ability of enabling a global peer-to-peer payment system, which is currently hampered by high transaction fees and long transaction confirmation times. So these folks argue that Bitcoin currently is rather used as a speculative investment vehicle than as a means of payment – a development that puts its price on a shaky ground and therefore forces the entire Bitcoin network to be at the mercy of wavering speculators.

Smart money or dumb money?

So is it really true that the current inflow of money into Bitcoin is just a bunch of dumb money that could possibly vanish just as fast as it originally poured in? Are Bitcoin investors just hoping to turn a profit by selling their Bitcoin a few months down the road to some greater fool that still wants to get in on the action? Is the current price rise truly as irrational as usually depicted?

One argument, which sort of tries to rationalize things, goes something like this: As a matter of fact Bitcoin is attracting so much money so fast, the underlying technology is not able to keep up with it. So although it might seem like as if Bitcoin’s functionality (which ultimately is it’s value) and it’s price do no longer match at the moment, this disconnect isn’t quite real, since there’s much development going under the surface to close this gap between Bitcoin’s value and its price. So once for example the Lightning Network will be up and running, it will again be convenient to use Bitcoin as a means of payment because transaction costs and confirmation times will have almost disappeared. Given these upcoming future developments in Bitcoin, some people argue, the money that is flowing into Bitcoin right now is doing so in anticipation of these major future developments.

So what about the case of Lightning failing to deliver on its promises? Although everyone is very positive at the moment, this does not mean, that it is going to work out just fine. With Bitcoin, many people in the beginning thought that the idea of Bitcoin and its technology is never going to work. Nine years after its launch, Bitcoin still exists and the network is still functioning. It might just be the opposite with the Lightning Network. Even though everyone thinks it is a no-brainer, it might just as well go down the drain. After all, there’s still many things that need to be sorted out with the Lightning Network. There are people who point out that the Lightning Network might not offer enough leverage to scale, if Bitcoin really wants to become a truly global settlement layer for payments with virtually no fees and almost instant transaction times. This is why some caution the optimism around the Lightning Network by pointing out that even a Bitcoin with Lightning might have to increase its block size when aiming at becoming a direct, fast and cheap medium of exchange on a global scale – or this function will be left to other cryptocurrencies like Bitcoin Cash or Litecoin.b

In search of a greater fool

One concern that is uttered quite frequently nowadays is the fact that hedge fund managers and other financial investors from the established world are buying into Bitcoin with huge amounts of money. The argument goes that many of these financial players do not really have future developments like the Lightning Network in mind, when pouring their money into Bitcoin. All they are out for is to make money and nothing else. The hedge fund managers and bankers, i.e. Wall Street as a whole does not care about Bitcoin’s original idea as a peer-to-peer payment system. Lightning doesn’t mean anything to them. They are in for profit. Is the currently staggering price level of Bitcoin, which is to a great extent caused by hedge funds and other financial players buying Bitcoin at the moment, therefore just irrational speculation for profit as greater fool theory suggests?

Hedge funds and other financial players might be speculating – but it might not just be mere speculation on making a quick buck. They might be speculating against the one system, they are themselves a part of. As hedge funds, they know all too well that there is great risk in our financial system today. This systematic risk stems from the fact that our financial system is broken at its very core. Our financial world of today is kept from collapsing by an ever increasing credit expansion that itself is fueled by borrowing ever more debt into existence. Because our financial system is imminently flawed and can only be sustained by manipulating financial markets, these very markets have witnessed major distortions and have therefore turned into massive black boxes no one can really interpret anymore. Our financial system today is like a giant volcano that could explode anytime.

Knowing this is one thing; being able to sort of protect against it another. Because markets today are manipulated and the act of manipulating causes interventions to spiral and trigger the need for ever more intervention, central banks were and still are forced to react ever more aggressively. As a consequence they have bloated an “Everything-Bubble”, with all major asset classes walking in lockstep. Everything within a fund manager’s portfolio seems to be correlated. This significantly raises the risk of total failure in the case of an economic crash. Therefore a newly arising asset such as Bitcoin, which does not seem to be correlated with all other financial assets must really trigger interest of financial investors.

Psychology matters

Hearing this argument, some astute commentators are quick to point out: Bitcoin isn’t really negatively correlated with the financial systems. As a matter of fact these folks argue, Bitcoin is just as much a creature originating from the “Everything-Bubble” we have to day and is rising like everything else in the financial system – although crypto assets are rising at a much greater pace. Bitcoin is really no different from traditional asset classes and will also implode once financial turmoil sets in.

But Bitcoin is only seemingly correlated with other financial assets like bonds, equities and real estate. Having been created as an antidote to the financial systems, Bitcoin has a coherent philosophy behind it that runs contrary to the established world of finance and therefore separates it from everything that is considered to be part of this financial world. As long as there is no counterproof furnished by reality, Bitcoin will exist as an uncorrelated asset in many people’s heads because of its founding philosophy that makes up a great part of Bitcoin. Even if it will turn out not to be an uncorrelated hedging asset, only a financial crisis will be able to ultimately prove this. But until a crisis could actually call the bluff, imagination will rule hedge funds’ and other investors’ actions, which is why their current move to readily stack up Bitcoin in anticipation of its hedging quality can be interpreted as such.

Furthermore, when another financial crisis happens a major sell-off in Bitcoin would be mitigated because of one fact not to be underestimated: To this day, it can be assumed that a big portion of Bitcoin is still in the hands of many early adopters, who are mostly in it because of ideology. They are the so-called “hodlers”, which means, they will hold onto their Bitcoin especially during times of financial distress.

No other alternative

As for hedge funds and institutional investors that are piling into the crypto assets, it is true that in the event of another financial crisis, they would most likely sell off their Bitcoin holdings in advance to any other asset. Why? Because – next to gold – Bitcoin is likely to be one of the most liquid assets to pay down margin calls and other imminent liabilities. And it will likely be liquid because the order book is not going to break down as investors all around the collapsing system are going to look for a safe haven. Bitcoin will likely be seen as a safe haven because of the already explained non-correlation and lack of alternatives.

In the light of these considerations calling Bitcoin’s current run a mere speculative bubble for short-term profit might miss the broader picture. The broader picture many Bitcoin investors like hedge fund managers and others might have.

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