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Apple Inc. (AAPL), Bank of America Corp (BAC): Why The Bitcoin is Doomed to Fail

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In recent weeks, interest in Bitcoin, the counterculture cryptocurrency, has soared along with its price — at last count, one Bitcoin fetched $138, up 2,600% in a year and 550% in two months. A number of journalists and financial bloggers simply aren’t sure what to say about Bitcoin, because it’s not generally well-understood, even within the small circle of true believers that stand to gain the most from continued publicity. Some people will tell you that Bitcoin has a bright future as a currency based on attributes that place it at odds with every other widely accepted currency in use today. Others want to stand back and watch it rise as a store of value, caught up in the excitement of rapid price-appreciation.

Not me. I learned about Bitcoin in 2011, just before it went on its first massive run, from less than a dollar to a peak of $35 that summer. I didn’t think it was worth anyone’s time then, and it’s still not worth anyone’s time now, unless you have a taste for gambling and some money that you don’t particularly care about. The very reasons why Bitcoin has taken off today will be major reasons why its value is likely to collapse tomorrow.

Don’t believe me? Today we’ll be taking a look at one of Bitcoin’s greatest problems — its dramatic price instability — and attempting to explain why that instability will continue to undermine wider adoption. This, perhaps more than any other reason (although there are others), will cause the ultimate failure of the Bitcoin experiment.

Bitcoin will fail because it has no fundamentals beyond the news cycle
Most currencies will fluctuate in value against other currencies based on a number of known factors. Maybe the issuing nation’s economy grows stronger relative to the rest of the world, so the value of its currency grows. Maybe there’s too much currency in circulation, causing the currency to devalue relative to others. Maybe interest rates create too much inflation or too little. Generally, though, the world’s major currencies tend to be reasonably stable.

Bitcoin, however, is not stable.


Source: Blockchain.info.

Why is the price of a single Bitcoin so high right now? We can delve into any number of complex answers that may be partially right and get the big picture wrong. The simplest explanation of the current spike in Bitcoin value is that the price of a Bitcoin is directly related to the publicity given to Bitcoin. There’s no better way to highlight this than to pair the above graph with one showing Bitcoin search interest over time:


Source: Google Trends.

Here’s what Apple (NASDAQ:AAPL)‘s search interest chart looks like, for comparison:

The spike in interest in late 2011 (C) corresponded with the death of Steve Jobs. The spike in late 2012 (A) owed to the iPhone 5. Apple (NASDAQ:AAPL)’s stock price actually peaked in September of 2012, just before the iPhone 5 spike. Media-driven popular interest in large, liquid stocks — and in major currencies — generally has a low correlation to prices.

AAPL Total Return Price Chart

AAPL Total Return Price data by YCharts.

Of course, the argument persists that Bitcoin does have fundamentals that make it a viable and valuable currency, and over the next few days I hope to dismantle those arguments. The only real fundamental attribute of Bitcoin is a known degree of scarcity, but this alone doesn’t justify a move from $10 to $135 in two months. For now, let’s stick to the stability problem. Why does the news cycle drive prices so much? Simply put: Very few people who hold Bitcoins actually want to use them once they’ve been acquired, as the prevailing belief among Bitcoin holders is that it will continue to appreciate in price.

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