At some point, governments will intervene
Bitcoin didn’t quite hit $50,000 today. Nevertheless the latest surge in the cryptocurrency’s value — triggered by Tesla’s $1.5 billion purchase — brings Bitcoin closer to point at which it becomes a mainstream investment.
Of course, Tesla is no ordinary company. Its CEO, Elon Musk, is now the richest man the world (take that, Jeff Bezos!) — and thus can afford to take a risk or two. What would be more significant is if less exciting companies follow Tesla’s lead. Indeed, the more boring the investor, the more interesting things will get for Bitcoin.
When demand from investors surges for a particular currency or bond or stock, the issuers of the asset can respond by issuing more of it. For instance, governments have been able to issue more debt because the money markets keep buying bonds (not to mention money-printing central banks). This stops the asset from surging wildly in price. For many investors this is part of the attraction — they’re more interested in having reliable stores of value than making a killing.
However, the whole point of Bitcoin is that its supply is deliberately constrained. The price impact of significantly increased demand from big corporate and institutional investors could therefore be dramatic. One can’t rule out surges — and collapses — on a grander scale than anything seen so far.
Should governments be concerned? After all, Bitcoin speculation isn’t like, say, commodity market speculation. It doesn’t destabilise the price of anything that anyone needs to buy. Furthermore, Bitcoin buyers know what they’re getting into — or at least they ought to. If they lose their shirts, there’s absolutely no moral obligation on the part of government to bail them out.
The only real danger is if Bitcoin values enter a sustained upward spiral without any sign of correction. In that case, the pressure on mainstream investors to abandon normal practice and pile-in becomes unbearable.
One can reassure oneself that we’re talking about rational people here — and that asset values don’t get pushed way beyond what is reasonable. But that obviously isn’t true. It can happen and has happened over-and-over again. No asset bubble inflates forever, but when a really big one pops — like the Japanese property market bubble in 1991 or the sub-prime mortgage market in 2008 — the after-effects are devastating.
We’re nowhere near such a scenario with Bitcoin, but one wonders at what price governments would intervene. $100,000? $200,000? $500,000?
Unlike most assets, the key question here is not ‘how high can Bitcoin go?’, but how ‘high will it be allowed to go?’.