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Bitcoin and Speculation

Bitcoin and other cryptocurrencies have been on a roller-coaster ride in the month of May with fortunes being made and lost in a span of weeks. Bitcoin prices reached their all-time high of over $2,700 per coin before correcting severely to under $2,000.

Ethereum, another cryptocurrency, also followed a similar pattern but has recovered significantly better than Bitcoin over the last few days.

The recent price action of Bitcoin closely correlates with a common pattern found in speculative bubbles. But because this pattern is similar to a fractal - that appears over and over again - it is impossible to know if this recent crash is "the" crash, simply a bull trap, or the start of another wild move upwards.

Many Bitcoin investors remain optimistic about the cryptocurrency and believe it will go above $3,000 this year. Others are converting their Bitcoin profits to gold and other precious metals.

The Future of Bitcoin

Bitcoin undeniably has a bright future as a speculate asset and hedge against economic uncertainty. But it probably will not replace gold or even fiat currencies due to its scaling issues and technological complexity. The unprecedented surge it Bitcoin usage has revealed flaws in the system. Transaction times and transaction fees have increased dramatically, and ideological disagreements about how to rectify this problem are dividing the Bitcoin community.

In the coming months, Bitcoin programmers will have to choose how best to address the scaling issues with Bitcoin. The choice is between something called segregated witness “SEGWIT” and a user activated soft fork called “USAF”. These two solutions will affect bitcoin miners and users differently and will probably decide where prices for the currency go over the next few years.

The technology behind Bitcoin is complicated beyond the scope of most investors, and this complexity will probably hinder its adoption outside of the specialized uses it is currently ideal for. While Bitcoin may make a good investment in the short-term, long-term investors will be better served by gold and other precious metals.