Why the Current Bitcoin Frenzy Possibly Hasn’t Peaked Yet

While Bitcoin  (GBTC)  has seen a massive run-up over the last three months, the party might not be poised to end just yet.

As others have noted, Google search activity related to Bitcoin (while having spiked lately) remains below its late-2017 and early-2018 highs. Arguably, that’s one sign that the current, speculative, retail fervor surrounding Bitcoin isn’t yet quite as extreme as what was seen three years ago — even if Bitcoin is now more than 50% above its late-2017 peak.

Notably, it’s not just search activity for “Bitcoin” by itself that’s below late-2017 levels. The same holds for searches for keywords/phrases such as “Bitcoin price,” “how to buy Bitcoin,” “Bitcoin wallet,” and “Coinbase.” Amusingly — but not all that surprisingly, given what’s recently happened in equity markets — the two exceptions to the rule among the phrases I searched were “Bitcoin stock” and “Bitcoin ETF.”

The other thing that stood out to me is how — in spite of the spike seen in U.S. retail Bitcoin purchases due to Square (SQ) and PayPal’s (PYPL) efforts to support cryptocurrency trading on their platforms — the U.S. is now far removed from being the leader in per-capita Bitcoin search activity.

The U.S. is respectively #14, #12 and #10 in searches for “Bitcoin,” “how to buy Bitcoin” and “Bitcoin wallet,” generally trailing a slew of African and European countries (and also at times, Canada and Australia). Though thanks to the Robinhood effect, the U.S. is #2 (behind only Canada) in searches for “Bitcoin stock.”

Part of the gap between present-day and late-2017 search activity likely stems from consumer familiarity with Bitcoin websites and services being higher today than it was a few years ago (and as a result, the need for Google’s help to get to websites of interest has diminished). But to some degree, the gap does look like a sign that the pure speculative element to Bitcoin’s current rally — i.e., the percentage of Bitcoin being held by people buying it simply because they see it rising and are looking to quickly flip it for a profit, as opposed to long-term believers in Bitcoin as an asset class — is still lower than in late 2017. For comparison, see how much higher search activity is for “Tesla stock” than it was at any point prior to 2020.

Meanwhile, there’s a fair amount of evidence that institutional support for Bitcoin is a lot higher than it was three years ago, with a number of hedge funds and other investment firms having disclosed large Bitcoin positions (there’s also the case of business intelligence software firm MicroStrategy (MSTR) , which has bought a large chunk of Bitcoin and has become a darling of Robinhood traders as a result). Indeed, it looks like Bitcoin’s recent surge owes itself to a spike in both retail and institutional buying.

Barring something truly cataclysmic happening to the global monetary system, I’m still pretty skeptical of predictions that Bitcoin will emerge as a popular substitute for the dollar and/or other major fiat currencies for conducting real-world transactions, particularly given its volatility and its treatment under capital gains tax laws. But as I discussed in a June 2019 piece, the case for Bitcoin potentially emerging as a widely-supported gold alternative is stronger, given the advantages a decentralized cryptocurrency has in theory relative to a metal-based store of value in terms of secure global access and (due to the fact that Bitcoin’s supply growth is mathematically fixed) protection against unforeseen supply spikes.

Whether Bitcoin (current market cap of $630 billion) actually pulls this off really comes down to how much people believe it to have value as an alternative to gold (total global value of more than $9 trillion) and other stores of value over the long-term (there are some clear parallels here to things like art and sports collectibles). And it’s fair to say that such belief is broader right now than it was either of the last two times Bitcoin’s chart went parabolic.

As a result, while it definitely wouldn’t shock me if Bitcoin gives back some of its recent gains in the coming weeks, I think this is a very different animal than the stocks that have recently become party to speculative manias, and for which I’ve been raising alarm bells for a while.

One can declare an electric vehicle SPAC or some other bubble stock to have an intrinsic value far below its current market cap based on an appraisal of its likely future cash flows, discounted back to the present. Declaring Bitcoin to be worthless at this juncture is (given the support it now has as a store of value) a bit like saying that a Michael Jordan rookie card has no more intrinsic value than a small cardboard photo of Jordan created today using a commercial printer. On a theoretical level, this assertion is true, but on a practical level, it’s meaningless.

Of course, this doesn’t mean the Jordan rookie card can’t drop in value if, say, the sports card market cools or Jordan’s stature among basketball fans diminishes for some reason. It just means that the rookie card’s value is quite unlikely to drop to that of the newly-printed photo. Likewise, Bitcoin’s value could drop if support for it as a store of value diminishes, or if some other asset seen as a store of value (whether a cryptocurrency or something else) steals a bit of its thunder. But as long as there’s meaningful support for it as a store of value, it’s quite unlikely to crash and wither away in the manner of a Pets.com or eToys

One final thought: Bitcoin has now twice recovered from 75%-plus crashes that followed speculative frenzies to comfortably take out its old high. On a psychological level, that’s probably breeding a “boy who cried wolf” mindset among bulls (whether retail or institutional) towards declarations that it’s a bubble.

For all these reasons, my gut feeling is that Bitcoin’s current run isn’t yet near its end, though we might now be closer to the end than the beginning.