Mohammed A. El-Erian and Roger McNamee are in agreement: as we enter the new year, the Bitcoin market is at a critical point in its development. In separate articles, both financial experts expressed their beliefs that, following a meteoric rise in 2017, the near future will define how history views Bitcoin in hindsight.
Time for a New Paradigm?
“[In] the waning days of 2017,” Mohammed A. El-Erian writes in an op-ed for Bloomberg, Bitcoin’s “market is at a crucial juncture.” A chief economic adviser at Allianz, El-Erian argues that “the market finds itself at an important juncture – perhaps even a defining one.” In light of the recent holiday dip, he believes that “this sharp price correction will act as a catalyst for expanding what, until now, has been quite limited institutional involvement in this market – or it will become a stage in the deflation of a remarkable and historic asset bubble.”
Recently, Bitcoin has gone into a free fall from its all-time high of US$20,000 reached on December 17. For new investors in the cryptosphere, this correction was likely a harsh first lesson in an unconventional, extremely volatile market. For market veterans, it was just another day at the office – another hard-to-stomach correction after a butterfly-inducing bull market ride to new all-time highs.
As El-Erian points out, Bitcoin rode the crests and troughs of this rollercoaster market with the help of a dedicated, relatively small investor base.
Long positions in Bitcoin – “that is, those who bought bitcoins outright, either as an investment or as a trade – are dominated by individual (‘retail’) investors,” he writes. “Meanwhile, large institutional investors (such as traditional mutual funds, Wall Street banks and established hedge funds) have generally remained on the sidelines, even though their involvement is key to bitcoin’s sustainability.”
Further, in the wake of Bitcoin’s Christmas correction, “the most important question facing it is whether the recent price correction will prove to be what market participants refer to as ‘healthy,’” according to El-Erian. Given the size of the market’s investor base relative to its 2017 growth, he argues that a healthy correction would be “one that serves to shake out excessive irrational exuberance, provides for the entry of institutional investors, encourages the development of market-deepening products, and widens and balances out the investor base and the product offering.”
In a separate CNBC interview, Elevation Partners cofounder Roger McNamee echoed El-Erian’s observation that Bitcoin has so far subsisted on marginal investment capital.
It’s “still a very small market in the context of the larger financial world, but it has had a huge year. We’ve done it around a speculative mania,” McNamee stated in the interview. He also believes that, if this mania continues, Bitcoin may become “self-fulfilling” and emerge from a potential crash as “a legitimate industry.”
“With the amount of activity going on around it, there are people willing to invest the kind of dollars it takes to make a thing like bitcoin into a long-term part of the financial market.”
McNamee holds that, as an asset, Bitcoin is still too young for anyone to make a judgment on how it will mature in the financial sector over the years to come. He does believe that 2018, though, will be critical for outlining this future.
“You’ll have these big swings, up and presumably down, as well. And, you know, wherever that settles out I think will tell us a lot about the role of bitcoin long-term,” he said.
Whether or not the bubble will pop or be inflated to new parabolic highs in 2018 remains to be seen; we don’t have a crystal ball, and neither do the world’s business leaders.
But according to McNamee, it likely won’t “be the end of the story either way.”