“This is a bubble and there is a lot of froth. This is going to be the biggest bubble of our lifetimes… But bubbles happen around things that change the world,” His son’s friend’s mother called him wanting to put all her savings in bitcoin. “Not a good idea,” he said. “Maybe 5%.”
Don’t mix up Bitcoin with Blockchain technology. Blockchain could change the world. Not Bitcoin. Even if we were to accept the argument then it should be noted that the internet changed the world… but a lot of people lost a lot of money is something called the dot-com bubble…
The greed has led to the creation of futures contracts that will start trading this month. Is it smart to start such an instrument just before the holidays? Most seasoned traders would disagree.
Also, the mechanism to calculate the index (BRR) to which Bitcoin futures will be settled is not simple at all. As Kid Dymanite points out in his article “Let’s Talk About Arbitrage – Bitcoin Futures Edition“:
“To summarize, the BRR will be calculated by taking all of the trades on 4 different exchanges (Bitstamp, GDAX, itBit, and Kraken), calculating the VWAP (volume weighted average price) for 12 separate 5 minute periods, and then taking the arithmetic average of those 12 VWAPs.”
This complexity in an untested 2-way market is likely to be less efficient than people expect. Furthermore, while many expect the futures to reduce Bitcoin volatility and bring down the price, in the short term it could be an additional driver to push it even higher…
“just as $GLD enabled the masses to easily get gold exposure, which flowed through to the underlying price of gold and was a massive positive force for the gold market, synthetic BTC derivatives like BTC-F will, at least initially, result in speculators seeking long exposure from the product, which will result eventually in demand flowing through to the underlying BTC”
Can the Bitcoin bulls value Bitcoin? It has no cash flows so what’s it worth? As Vitaliy N. Katsenelson so eloquently put it in his article Bitcoin – Millenials Fake Gold “But Wall Street strategists have already figured out how to model and value this creature. Their models sound like this: “If only X percent of the global population buys Y amount of Bitcoin, then due to its scarcity it will be worth Z”.
Vitaliy reminds us that this is similar to the valuations during the dotcom bubbles. Coke was clearly overvalued but “bulls used this math: “The average consumer of Coke in developed markets drinks 296 ounces of Coke a year. These markets represent only 20% of the global population.” And then the punchline: “Can you imagine what Coke’s sales would be if only X% of the rest of the world consumed 296 ounces of Coke a year?” Somehow, the rest of the world still doesn’t consume 296 ounces of Coke.”
I agree with Vitaliy 100%. At the core, the investor should ask himself “Since I can’t value it, how would I feel if it drops 20%, 50%?” Grandmas are buying bitcoins not because they believe in cryptos but because they are afraid of missing out. It occurred in the 1600s with the tulipmania and its happening again today. And of course, this doesn’t mean that Bitcoin can’t go higher.
But keep in mind that governments would never allow cryptos to replace fiat currencies. As Vitaliy points out “… governments are very particular about their monopolistic right to control and print currencies – this is how they can overpromise and underdeliver. No less important, the anonymity of cryptocurrencies makes them a heaven for tax avoiders – governments don’t like that.”
The Chinese government imposed a nationwide ban on cryptocurrency exchanges and while there is news that they may be allowed, “[they] shall adopt ‘0-tolerance policies’ towards crimes hidden underneath and take measures such as record-keeping, licensing, AML processes, real-name, limiting large transactions.” Doesn’t sound in-line with what Bitcoin supporters want…
Keep in mind that a ban on cryptos can happen anywhere. In 1933, the U.S. President made it illegal to “hoard gold coin, gold bullion, or gold certificates.” People were required to deliver all but small amounts of gold to the Federal Reserve in exchange for $20.67 (Wikipedia).
But these are not the only reasons one shouldn’t invest in Bitcoin. Evergreen Gavekal agrees with Vitaliy and gave four additional reasons in a must-read post (link): Bitcoin is extremely volatile, Bitcoin doesn’t behave like a currency, Bitcoin isn’t backed (also an argument made by Vitaliy), Bitcoin is extremely expensive.
So people thinking about investing in Bitcoin should consider the above. The fact that it can’t be valued, is not backed by anything and regulation could wipe out its value at any point in time should be enough for any investor to turn away. Gamblers… well… good luck…