Knowing when to stay away
Bitcoin’s wild ride this week—trading between $10,000 and $20,000 has garnered global attention on the cybercurrency. Few pundits have even begun to dub bitcoin as “digital gold” because of the fact it has a finite supply and has, at times, seen price rises due to geopolitical tensions.
Venezuela said it will launch a cryptocurrency backed by oil and diamonds, the Australian stock exchange announced it will adopt a blockchain-based alternative to clear and settle trades, and the derivatives exchange in Chicago is launching the first bitcoin futures contracts this weekend, potentially attracting a wave of institutional money. Individual investors are jumping on the bandwagon en masse trying to make a quick buck. One couple even went as far as asking guests at their wedding, if at all they wanted to give the couple a gift, bitcoin would be preferred.
All this points to only one outcome – bursting of the bubble. Most famous bubbles of the past – Internet stocks, canals, railroads and motor cars all had a great future ahead of them until…
Future Wealth’s View
Bubbles tend to be driven either by new technologies (railroads in 1840s or the Internet in the 1990s) or by new financial innovations (2008 financial crisis). Bitcoin, the latest financial innovation, which started out as potential alternative to hard currency, has now become the latest bubble.
In our report on bitcoin in Sep 2017, we stated that unpredictable pricing, lack of safety net, reports of hacking, ties to organized crime and not regulated by any government entity disqualifies bitcoin from being a viable alternative as a digital currency. But, that has not stopped speculators, traders, greedy investors and apparently, even those getting married to chase this cryptocurrency to astronomical levels.
Parallels to Holland’ s tulip mania is striking. In 1636, tulips had become such a prized commodity that they were being traded on many Dutch stock exchanges and many people traded or sold possessions to get in on the action. The bubble burst in 1637 and things got very painful from there.
Many savvy investors recognizing the bubble have been waiting to short the bitcoin. They will get their chance later today, when the futures market opens in Chicago. But, the cost of shorting bitcoin could skyrocket as well. New short positions on bitcoin are being charged an 18.5% fee right now. But that could swell to over 50% by the time CBOE Global Markets bitcoin futures trading opens.
Our advice to investors is to stay away from the tulip mania of 2017 on either side – buying or shorting, and instead buy a dozen roses at the local flower market and arrange it inside a clear glass cylinder vase to give to your spouse. Unlike the bitcoin frenzy, this one will have none of the pain and all the gain.