WARNING: Bitcoin Bubble Alert

If you have any interest in buying bitcoins in order to cash in on its stratospheric rise this year……DON’T.  It’s too late.  Bitcoin (and cryptocurrency, in general)  is now a bubble commodity whose value will fall precipitously.   How can we be so sure?   Because 14 days after we posted this article, Bitcoin prices have dropped by almost a third of its value in just five days, with the digital currency on track for its worst week since 2013.   It’s going to drop even more in the coming weeks and here’s why:

The world’s most actively traded cryptocurrency has surged seventeen-fold in value so far this year.  It started the year worth less than $1,000 but has soared above $17,000.  As of December, its so-called market cap (i.e. its price multiplied by the number of bitcoins in circulation) rose to nearly $305 billion, according to Coinmarketcap, a trade website. By comparison, the market value of Wal-Mart Stores Inc is around $288 billion.   Bitcoin is just one version of crytocurrencies.  While bitcoin is the largest, with a market value of around $250 billion, and a nearly 1,900 percent increase in the past 12 months, there have been a wave of cryptocurrencies in recent years. Two other big ones, ethereum and litecoin, have seen even larger 12-month gains, 5,100 percent and 2,600 percent, respectively, according to a main digital currency platform CoinBase.

It is allegedly a currency, and yet online service companies have halted accepting it as payment.  For example, Steam is one of the most popular gaming services in the world, with 67 million monthly active players, putting it head-to-head with Sony’s PlayStation Network.   It began accepting bitcoin payments in April 2016 but last month announced that it would no longer accept this “cryptocurrency”.   The alleged role of this market is it’s usefulness as a currency, as a medium of exchange.  But a good currency will increase the money supply to match money demand better than Bitcoin and its progeny do.   A volatile and, currently, exponentially appreciating asset that people buy like a penny stock fundamentally cannot serve as a currency alternative.

Note that Tether is now under investigation by regulators. In late January, Bloomberg reported that the US Commodity Futures Trading Commission had sent subpoenas to Tether to explore whether the site really had any kind of financial backing…..all signs are that it doesn’t.  There are more than 100 exchanges where blockchain-based currencies are traded—places with names like Coinbase, Bittrex and Kraken. But many of these exchanges lost their ties to traditional banking partners or were unable to find new ones, making it harder for speculators to sell their cryptocurrency holdings for dollars or other fiat money.

So what is cryptocurrency?   Perhaps in the future, it may be a currency market offering an alternative to country-backed currencies.  But right now it is a speculative mess.  This unregulated currency market — remember it was created in 2009 by an unknown person using the pseudonym Satoshi Nakamoto — has no oversight. It is black box trading  by computers using complex algorithms.  It became popular with criminals, corrupt officials trying to move money offshore and others who wanted to move money anonymously.  Unfortunately, as of 2017,  it’s been mom-and-pop investors who have been buying in in order to take advantage of the bubble. Many of these unsophisticated buyers are based in Japan and South Korea, where recent regulation changes have made it easier to trade bitcoin, according to experts.

Market bubbles are a well documented phenomena in which surges in asset prices to levels significantly above the fundamental value of that asset are fueled by unsophisticated speculators. Bubbles are often hard to detect in real time because there is disagreement over the fundamental value of the asset.  The primary factors behind most all economic bubbles are twofold:  a weak financial policy and excessive monetary liquidity in the financial system. When interest rates are artificially low (as they have been since 2008), investors tend to avoid putting their capital into savings accounts. Instead, they lever their capital by borrowing from banks and invest the leveraged capital in financial assets such as equities and real estate.  This lays the foundation for economic bubbles.

There are a few examples of economic bubbles.  They include: stock market bubble, real estate bubble and bubbles on other markets, including precious metals, energy resources and other goods. The classical example was the Dutch tulip mania in 1634–37 markets, but at least tulips actually existed.  More recently, dotcom investors in 2002 took a bath from which they’ve never dried off.  And dotcom companies at least had some assets to back their inflated prices.   In contrast, bitcoin is merely a concept programmed into a complex computer system by largely unknown programmers.
Over the millenia, experts have learned that the best way to avoid economic bubbles is to have an international lender of last resort who will lend money or resources, when no one else will and will also alleviate the situation with its moves, thus preventing people and various monetary institutions from panicking and suddenly unloading their investments.  However, in the bitcoin world, no such ‘governor’ mechanism exists.   Technically, bitcoins are back by $0 in assets.  Zilch; rendering it the Wild West of financial speculation and bitcoin investors are likely to be dealt the same fate as the many innocents who perished in the Wild West.
As noted recently by The Economist,  “Indeed its (bitcoin) exponential rise only reinforces the argument. The beauty of bitcoin is that its intrinsic value is impossible to determine and that makes any value plausible to true believers. This is not the same as saying there is no merit in electronic currencies or blockchain technology; of course there is. But the range of prices which can be found on cryptocompare shows this is a narrow, illiquid market…….This might have made it a great investment for those who got in at the right price and are nimble enough to get out in time. But it doesn’t make it a useful means of exchange. When the price is rising fast, those who use bitcoin will be reluctant to part with it; when the price falls, those who sell goods will be reluctant to accept it.”
It’s also a very fragile commodity.  Reuters reports that in just one week, cryptocurrency trading operations have struggled to maintain their operations.   On December 12th, Coinbase, went down under the weight of traffic, leaving many of its more than 10 million customers unable to access their funds.  Similarly,  Bitfinex, the world’s biggest bitcoin exchange by trading volume, suffered a heavy denial-of-service (DDoS) attack that took down its website and suspended its services.   Just the week before, bitcoin surged from below $16,000 to $19,500 in less than an hour on Coinbase’s exchange, while it was changing hands at less than $16,000 on another, Bitstamp.  These examples of dysfunction in just a 7-day period suggest a market infrastructure still in its infancy, incapable of coping with investor demands.  If cryptocurrency was food, chefs would call it a recipe for disaster.
Similarly, cryptocurrency security hasn’t reached the necessary level of maturity.   South Korean cryptocurrency exchange Youbit announced in mid-December that it ceased operations and filed for bankruptcy after it was hacked for the second time this year.   During the same week,  EtherDelta, a popular exchange for buying cryptocurrencies, suspended its service after it was apparently hit by an attacker.  The previous month,  hackers stole more than $30 million worth of cryptocurrency from Tether, according to cryptocurrency news site CoinDesk.  And in late January, Coincheck last week reported 523 million units of virtual-currency tokens on the NEK blockchain — a value of about $530 million — had been stolen, one of the largest hacks in over 3 years.  Stories about hacks or thefts of cryptocurrency companies has become an almost daily occurrence.
According to an analysis by Bitcoin.com, of the 902 ICOs from 2017 listed on fairly comprehensive crowdsale site Tokendata, 142 failed at the funding stage and a further 276 have failed, “either due to taking the money and running, or slowly fading into obscurity.”
The experienced investor will view bitcoin as a very high-risk, speculative commodity.  If you don’t choose to believe us, then you might opt to consider the opinion of Stephen Roach, former chief economist at Morgan Stanley and Yale University fellow, who recently warned bitcoin was a “toxic concept for investors”. “I’ve never seen a chart of a security where the price really has a vertical pattern to it. And bitcoin is the most vertical of any pattern I’ve ever seen in my career,” according to CNBC.  JPMorgan chief executive Jamie Dimon has described bitcoin as a fraud and investors of bitcoin as “stupid”. He put his JPMorgan staff on notice that he’d fire any money manager caught trading bitcoins.  This week, governor of Sweden’s Riksbank and the chairman of global regulators at the Basel Committee viewed bitcoin investment as a “dangerous endeavor“.
And what does the world’s most successful investor think of bitcoin?  The ‘Sage of Ohama” said:  “Stay away from it.  The idea that it has some huge intrinsic value, is just a joke”.   If you choose to invest in bitcoins at the peak of its bubble, you will likely find that the joke is on you.  And it will most definitely not be a funny joke.

UPDATE:  One year later.

Bitcoin has dropped from over $15,000 to about $3300 in the last 12 months.  Ouch! for those buyers who didn’t read this December 2017 post.  Congrats to those who did.

1 reply
  1. Mickey
    Mickey says:

    Thіs is important information about bitcoins, especially to those new to the blogosphere. Short but ѵerʏ aϲcurate info… Thanks for sharing thіs with all of us. A must read post!


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