Enjoy the rise in bitcoin because soon there will be a legitimate two-way market in the device. The CBOE, the CME and the Nasdaq have all thrown their hat in the ring to offer derivatives on bitcoin trading to give everyone a better, more broad way to be involved in the instrument without venturing into what some believe is the wild west of trading.
Notice I never once called bitcoin a currency or even a crypto-currency. That's because with its recent ascent, it has lost its ability to be hallowed as a currency and has simply become some sort of abstruse casino game that seems to have only winners and no losers.
I think that's about to change. Not at first, as the size of the market is only $250 billion, far less than what would be regarded as an important currency and -- given its popularity -- certainly means it could be triple, quadruple, or quintuple that given the lack of sellers.
So why am I suspicious of this table game?
First, no one knows who created it. Second no one knows how much the creator reserved or took. Third there is virtually no transparency into the underlying system. None whatsoever. Fourth, there is no government backing -- obviously, there are no underlying assets and there is no military support for the bitcoin system, unlike legitimate currencies. Fifth, despite the allegiance its buyers swear to blockchain as the secure way to transact, it is software -- and the one thing we know about software is that it can be hacked. When, not if, but when, it will be a total loss as there is no insurance and no fiat backing.
With those five considerations, do we really think that this lottery system that is currently devoid of losers can remain that way?
Now, what's happened along the way is that I believe Bitcoin is being hoarded by a select few players who keep the supply on the market tight. Bitcoin can be mined, something that has made it seem like the death knell of another asset that is accepted worldwide, gold. We find about 1% of the world's supply each year, which has kept the precious metal precious.
Unlike gold, these hidden baubles can be mined using computer cards from Nvidia (NVDA) and Advanced Micro Devices (AMD) . The two companies have it as an interesting and unimportant sidelight and they have done much to minimize the prospects of the prospectors -- as opposed to Square (SQ) CEO Jack Dorsey, who has played up the desire to give merchants an effective way to accept and trade bitcoin to meet client demand. He has been far more aggressive about the company's commitment to it and the importance of it than has Sarah Friar, the CFO, who came on Mad Money and discouraged my attempts to make it important to the Square narrative.
Now, into this breach come these three exchanges. Derivative trading of these devices will allow what is sorely needed, which is a two-way market. At last someone will be on the other side of the trade, which should help eliminate hoarding. Who will be so bold as to take the other side or be short bitcoin? We don't know. I would add though, that it may not eliminate the cornering of the market, but it certainly gives it the transparency that could legitimize it as more than a jewel to be owned and not traded with a seemingly finite creation of more of them.
When that occurs and an orderly market in this invention occurs, I think you will see a potential top in the ascent. Until right before their launch, though, it would not surprise me if there is still further to run.
Remember, though, just like any financial device that has suddenly caught the fancy of non-traditional retail buyers, a top can occur before then. Almost everyone is an unsophisticated buyer -- except the proselytizers who tell us that it is far more legitimate than what any country prints.
Good for them. When the other side of the trade develops and we learn more about who has hoarded them, we may think otherwise.
