Tuesday 19th September 2017
BitCoin – down but not out….
For the last couple of years, the bitcoin story has revolved around one theme and one theme only – price….
What price was bitcoin back in the day? What price is it today? What price will it be tomorrow?
The price of bitcoin had been climbing sharply….
Between July 16th and September 1st, the price of the cryptocurrency had risen more than $3000.00 to a high of $4950.72 – a spectacular rise of 255%….
Last week the bitcoin price fell off a cliff – falling all the way back down to $2981.05 on Friday.
It did not represent the end of the world. It did not – as some news sources suggested – represent the end of bitcoin either.
It was just a correction – a timely reminder that prices can fall just as swiftly as they can rise.
Even so, those bus drivers, nurses and ironworkers we reported on last week will be wondering how such a good thing went wrong so quickly.
But, in the world of money, an awful lot can happen in a few short days….
- A hammer blow delivered in Beijing….
It started in Beijing….
The Chinese authorities had already outlawed initial coin offerings the previous week – describing them as a form of illegal fundraising….
Last week came news that the Chinese were preparing to deliver a second blow by shutting down domestic cryptocurrency exchanges – effectively making it impossible for Chinese investors to trade….
There are rumors that authorities were concerned that Chinese investors were using bitcoin to bet that the value of the yuan would fall….
And that Chinese investors were using bitcoin to move currency outside Chinese borders whilst by-passing the traditional banking system….
Whatever the motivations behind the Chinese decision, the effects were almost instant – bitcoin went into freefall….
Then the British financial regulator took to the stage….
- ‘Prepare to lose your entire stake….’
The Financial Conduct Authority (FCA) issued a warning to investors that initial coin offerings are ‘very high-risk, speculative investments’ and that anybody getting involved should be ‘prepared to lose your entire stake….’
If that wasn’t enough on its own to damp down investor interest, the FCA was also at great pains to warn of the potential that exists for fraud….
‘Instead of a regulated prospectus, ICOs only provide a ‘white paper’. An ICO white paper might be unbalanced, incomplete or misleading. A sophisticated technical understanding is needed to fully understand the tokens’ characteristics and risks….’
It’s a message designed to encourage the man-on-the-street investor to steer clear of things he doesn’t properly understand….
Because the profits he might have been led to expect by recent hyperbole in the press and on social media websites may never actually materialize….
That’s probably sensible and timely advice. But it did its bit to take some wind out of the market sails….
|Not all profit opportunities require risk….
Last week served as a reminder that trading bitcoin carries risks….
That’s not the case with ‘Matched Betting’….
Right now, people are using this clever strategy to generate profits of £100s every month….
And they don’t risk a single penny piece of their own money in the process….
- Irrational exuberance….
So too did comments that were made last week by multiple men of considerable influence and authority….
Robert Shiller, for example….
This is an economist who has won a Nobel prize. He’s the author of the excellent book, Irrational Exuberance.
And he is also the father of one of our favourite market measures – the cyclically adjusted price to earnings ratio (CAPE) or Shiller PE as it is often referred to….
On top of all that, Shiller is well-known for having correctly called the last two market bubbles – before they happened….
So, when he tells journalists that ‘bitcoin is the best example of a bubble in the market today’, investors sit up and take heed. The market reacts….
- ‘I think that we are in a bubble’….
It’s a similar story when Vitalik Buterin has something to say about cryptocurrencies….
He’s the founder of Ethereum, the cryptocurrency with the second largest market capitalization – bitcoin’s biggest rival, if you like….
When his death was falsely reported earlier this year, it wiped $4 billion off the value of Ethereum. That’s how significant a personage Buterin is in cryptocurrency circles….
Last week came reports of something he’d said at a recent meeting in Israel with local cryptocurrency and blockchain tech companies and investors….
‘I indeed think that we are in a bubble because all the cryptocurrencies are rising and people have a feeling that they will always continue to rise. A lot of projects are raising more money than what they would be able to in the normal VC market, and sometimes there is no match between the necessity and usefulness of the project and its ability to raise money.’
In other words, Buterin believes a lot of cryptocurrency projects currently raising large amounts of capital will turn out to be losers because the projects have no actual real-world utility.
It’s a sobering message for investors who really don’t know how to distinguish between projects that will succeed and those that won’t….
And it served as another dampener on market activity….
- ‘Worse than tulip bulbs….’
I’m not sure that JPMorgan Chase chief executive, Jamie Dimon, has quite the same standing as the afore-mentioned pair.
But he too did his bit to depress bitcoin prices last week when he described cryptocurrencies as a ‘fraud’.
He was speaking at an event hosted by Barclays and that wasn’t all he said. ‘It’s just not a real thing, eventually it will be closed….’
Going further still he compared bitcoin to the most famous asset bubble in history. ‘[Bitcoin is] worse than tulip bulbs’.
And he told delegates he wouldn’t hesitate to sack any of his employees who traded in cryptocurrencies for being ‘stupid’.
And chief economic advisor at Allianz Global Investors, Mohamed El-Erian, got in on the act too – saying last week that bitcoin might lose up to half its value….
Talking to CNBC reporters on Wednesday, he said: ‘The current pricing assumes massive adoption, and I don’t think governments will allow the amount of adoption that’s currently priced in’.
- It’s only money….
Last week was probably a painful experience for some of the players with skin in the bitcoin game – especially those who arrived late to the party….
A sudden outbreak of negative sentiment and regulatory caution combined to throw a wet blanket over what had otherwise been a glorious summer of relentless gain for cryptocurrencies….
Given that this golden period had served-up only sunshine and lollipops to speculators, last week’s correction will have come as a shock to some. Many will be feeling sorry for themselves and licking their wounds.
It was a reminder that dogs bite just as well as they can bark; a reminder that what goes up can come back down again – often with little or no warning….
But, it’s only a fluctuation in price when all is said and done. The price of bitcoin can and probably will recover.
It is already doing so. These sudden panics, sell-offs and rallies are to be expected. Volatility, ups and downs, swings and roundabouts. It’s all part of the ongoing story….
- Where the value is….
Meanwhile, we should not be overlooking the fact that bitcoin is more than a price that speculators can bet on….
Bitcoin is not wholly reliant on frenetic trading activity in an over-heated market for momentum….
Bitcoin – and the blockchain technology that underpins it – have the potential to deliver real-world applications and benefits.
The future value of bitcoin will rest more on the widescale adoption of those applications and benefits than it will on players taking a speculative punt on the price in the market….
I had planned to write a little more on that this week. But last week’s events took me by surprise too. We’ll get back to it next week….
That’s how it looks from here….
All the best,