Bitcoin mania: Join the rush or beware the bubble?

Bitcoin mania: Join the rush or beware the bubble?

Bitcoin’s meteoric rise in value this year has outstripped even high-performing technology stocks tempting more investors to capitalise on the volatility while others steer clear fearful of a crash

When the Wall Street Journal’s headline reads Bitcoin: Even Grandma Wants In On The Action you can’t ignore it.

Bitcoin’s price swings have been prompting volatility-starved investors to join the biggest speculative boom since the 1990s dotcom fever. 

Just six minutes into 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.

Is Bitcoin a bubble?

Investment is being tempered by the fear that Bitcoin’s value is speculation driven. They’re wary of putting money into a bubble.

Some are convinced it’s the future. 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 investors are setting aside Bitcoin’s questionable past and use by criminal elements. Some see it as a viable alternative to gold as an investment. Especially when faith ebbs in fiat currencies.

‘Millions of active Bitcoin users’

“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. Microsoft are reportedly exploring Ripple’s Interledger protocol for their own blockchain toolkit offering. 

CME Group Inc., the world’s biggest exchange group, announced they were launching a Bitcoin futures contract next week. Goldman Sachs Group Inc. has also fuelled interest further by announcing intent to introduce products based on the virtual currency. Who knows what the price will be when these financial instruments kick in.

Bitcoin’s value has increased 17-fold this year

They’ve seen increasing numbers of investors being drawn by Bitcoin’s volatility. Bitcoin offers the potential for big gains while stocks and bonds have produced modest yields. 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 James Dimon,  J.P. Morgan Chase & Co. CEO and Berkshire Hathaway Chairman Warren Buffett. They argue that governments are likely to ultimately crack down, crushing Bitcoin’s price. 

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

Bitcoin for transactions

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 like central bank-backed money.

Central banks may adopt blockchain technology

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 definition of a bubble 

The suspicion is that people are buying Bitcoin expecting others to buy it from them at a higher price. The very definition of a bubble. 

If everyone Bitcoin owner tried to realise their wealth, the market would crash. Most investors know that this could happen, therefore, 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. However, what that is right now is anyone’s guess. 

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