Is Bitcoin a Replay of Silver in 1980?

It seemed like just yesterday that bitcoin traded around $5000. Now the price of the crypto-currency has gone parabolic, going from $5,000 in October to over $16,000 as of December 7, 2017.

To some veteran hands, the recent bitcoin rally reminds them of what happened to another store of value, silver, in the late 70’s, early 80’s. Like bitcoin today, the value of silver exploded in a short period of time, driven in part due to distrust in the financial system and in particular the Federal Reserve’s ability to keep inflation in check.

While the price action of bitcoin and silver seem similar, there are legitimate differences. Let’s analyze:

Bitcoin’s Rally Pre-December 2017 Wasn’t Due to a Short Squeeze; Silver’s Rally Was

Bitcoin’s rally in the recent years before December 2017 wasn’t due to a short squeeze. Before bitcoin futures, the crypto-currency was hard to short for most people because the mechanisms to short on official exchanges weren’t fully flushed out yet. Silver was easy to short back then because the commodity contracts were traded on official exchanges just as it is now. Due to that massive shorting and the fact that the Hunt brothers bought up so many contracts, silver prices exploded.

Bitcoin’s pre-December 2017 rally was instead due to speculation on the crypto-currency’s future potential and momentum buying. In terms of its potential, bitcoin certainly seems promising. Bitcoin’s tech could make financial transactions more efficient in the future. It could make it much more egalitarian financial system. The fact that so many people own bitcoin today makes it more likely to be used, which would in turn cause applications to be built upon it, which in turn would cause more people to use it. It is a virtuous cycle that could ultimately help bitcoin justify its value in the coming decades. There is also a lot of momentum buying with buyers hoping to catch some of the upward momentum.

With the advent of Bitcoin futures in December 2017, bitcoin can now potentially undergo short squeezes. In the same vein, however, the advent of shorting could be a catalyst that depresses the value of bitcoin. No one knows for sure what will happen in the future.

Hopefully the Parallel Between Silver and Bitcoin Doesn’t Continue

Silver prices fell sharply in the early 1980’s after the Hunts missed some margin calls and  government regulators introduced some new rules to prevent rampant speculation. Bitcoin bulls certainly hope that the prices don’t fall or that the U.S. government steps in. For bulls, bitcoin optimists hope that the technology can create long term value and also make its owners money. Given that bitcoin is risky, anything certainly seems possible and volatility in both directions could be ahead.

Disclosure: no positions

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