Bitcoin mania: Join the rush or beware the bubble?

Bitcoin mania: Is it too late to join the rush?

When the Wall Street Journal runs a headline that reads Bitcoin: Even Grandma Wants In On The Action, you’re simply compelled to find out more about the stand-out cryptocurrency that is grabbing all the attention. 

For months now, Bitcoin’s rapid price swings have been prompting volatility-starved investors to join the biggest speculative boom since the dotcom fever in the 1990s. 

In the six minutes following the start of Bitcoin futures trading, the contract expiring in January which opened at $15,000 rose to $16,600.  Trading on Monday morning (December 11th) in London the contract was changing hands at $17,500. Bitcoin itself was at $16,635.05 according to CoinDesk. Right now there is no hotter ticket having started 2017 at $968.23. 

The temptation to join the rush is tempered by the fear that its value is being driven purely on speculation and that the bubble is about to burst. 

Some are convinced it’s the real thing. John McAfee – founder of the eponymously named software – doubled down on his previous prediction and claimed: “I’ll eat my own d**k on national TV if Bitcoin doesn’t surpass $1 million by 2020.” 

More and more investors have chosen to set aside Bitcoin’s questionable past, for instance its use by criminal elements, and focused on the potential that it could replace gold as an investment to hold when faith ebbs in fiat currencies. 

“We now have millions of active users,” said Peter Smith, chief executive of Bitcoin services firm “We didn’t have a million last year.” 

Bitcoin’s meteoric rise has seen interest increase in other cryptocurrencies like Litecoin, Ethereum, Dash and Ripple. The latter’s Interledger protocol is being explored by Microsoft as part of their own blockchain toolkit offering. 

CME Group Inc., the world’s biggest exchange group, and Goldman Sachs Group Inc. Have fuelled interest further by announcing intent to introduce products based on the virtual currency. CME’s Bitcoin futures contract is expected next week. Who knows what the price will be when that happens. 

They’ve witnessed the increasing number of investors and traders being drawn by Bitcoin’s volatility in a market where stocks and bonds have produced modest gains. Even technology stocks, which have rallied sharply this year, can’t compete with Bitcoin which has jumped 17-fold. 

However, Bitcoin’s growth has also attracted critics like J.P. Morgan Chase & Co. CEO James Dimon and Berkshire Hathaway Chairman Warren Buffett, who have argued that governments likely will ultimately crack down, crushing Bitcoin’s price. 

“Bitcoin is a speculative bubble that will pop at some point,” wrote Michael Oliver, a market analyst at Momentum Structural Analysis in North Carolina. Much like the dotcom bubble, however, the sector will become more mature after its reckoning, he added. 

Supporters argue that once price stability is achieved, Bitcoin could be used as a currency to denominate a transaction, rather than just for speculative gains. 

“The infrastructure is coming in to deal with [this shift],” said Gavin Brown, senior lecturer in financial economics at Manchester Metropolitan University and director of cryptocurrency hedge fund Blockchain Capital. The process could take between 10 and 15 years, he said, adding that a “regulatory light-touch approval” would be a necessary part of this development. 

But critics warn Bitcoin cannot be used as a medium of exchange or store of value, in the manner of central bank-backed money. 

Tara Waters, a fintech lawyer at Ashurst, said: “Central banks may decide to adopt such technologies themselves, although it is likely they would adapt the technology to better fit existing systems and norms.” 

Like all asset classes, exiting the market is a crucial factor. Some platforms and exchanges take the risk of a trade on to their books and pay out customers from their own funds, until they can sell the currency on the market. If a fraction of customers sold, that could put a stress on the market intermediaries, which do not have access to credit at banks. 

For the moment, Bitcoin’s best hope looks like attracting more and more buyers who want to shift their savings onto the blockchain—and speculators willing to bet that those savers will arrive. The soaring price of Bitcoin alone shows that expectations are high. But as currency historian and Berkeley economics professor Barry Eichengreen said: “Expectations can change.” 

The suspicion is that people are buying Bitcoin because they expect other people to buy it from them at a higher price; which is the very definition of a bubble. 

If everyone who owns Bitcoin tried to realise their wealth, the market would crash and because investors know that could happen, the incentive remains to sell first. This will continue to be the case until Bitcoin demonstrates a sustained period of stability and reveals its true value. But what that is right now is anyone’s guess. 

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