When will the river of greater fools run dry?

Tuesday 7th November 2017

When will the river of greater fools run dry?

So, the Bank of England raised the base rate from 0.25% to 0.5% last week – the first rise in borrowing costs for a decade.

It’s a small hike but the average mortgage will go up by £22 per month adding to pressure on households….

Typically, banks raised mortgage rates immediately upon the Bank of England announcement but were not so quick to pass the increased rate on to savers….

The rise made a big noise in the papers. But this is only a very small step back in the direction of normality….

Granite-chinned markets barely took a step backwards. It will take more than last week’s rather puny left hook to wobble them….

I think of last week’s rate rise as though it were the pilot episode of a new TV series that will command more of our attention further down the road.  There is more to come. And that is when things will get interesting….

  • Bitcoin – on a tear….

Meanwhile, like everybody else, I’m unable to look away from the bitcoin saga….

Records are being broken day on day. Bitcoin punched through $5000 last month. Last week it went through the $7000 ceiling.

Look at the all-time bitcoin price chart and the line is almost vertical. And it shows no signs of flagging. This thing is going up, up, up like a rocket fired at the moon….

What is driving this phenomenal rise in value? What do bitcoin buyers think they are buying?

There is no business behind bitcoin. There is no upsurge in profit. No big new contract. No corporate merger or acquisition. No outstanding new development or product of research that might see the stock of a business take flight in such a giddy manner….

Bitcoin is essentially a currency – an alternative to the pound, the dollar, the euro and any other fiat currencies….

  • Seduced by destiny?

Maybe bitcoin buyers are seduced by the idea that the cryptocurrency is somehow destined to be globally adopted as a new primary currency of choice for businesses, consumers and investors….

Bitcoin supply is ultimately limited to 21 million units – about half of which are in circulation today. Maybe bitcoin investors are thinking that this limited supply, in combination with some overwhelming future demand, will ensure each unit is ultimately worth much more than is the case today. Significantly more….

Maybe that is what bitcoin buyers are thinking. And maybe they are right. Time will tell….

But to operate as a reliable store of value a currency needs the feature of stability. Who wants to be paid in a currency that might be worth half as much tomorrow morning as it was today?

And right now, bitcoin is anything but stable. The price is on a rampant charge. Investors are piling in like there’s no tomorrow and very little left of today – driving the price ever higher. Most, I suspect, have no idea what it is they are really buying….

And there is an old saying: ‘Up like a rocket, down like a stick….’. As impressively as bitcoin has risen this year, it can come down again just as fast – like a spent firework.

  • Quite an assumption….

And investors are making quite an assumption if they believe bitcoin is the cryptocurrency destined to replace all domestic fiat currencies….

Destiny is a funny thing. It’s a bit like a mirage. You can think it is something real and solid on the horizon only to find it has disappeared when you get there….

What about the competition to bitcoin?

Is there no chance on this earth that one of bitcoin’s many competitors won’t supplant it as the cryptocurrency of choice? After all, bitcoin is only one crypto-application on the blockchain technology that makes it possible.

Is it not possible that some new and well-backed cryptocurrency might emerge and replace bitcoin as the king-pin in this nascent sector?

Wikipedia tells us that there were 900 cryptocurrencies available over the Internet as of July this year. You can bet your bottom bitcoin that this figure is well into 4-figures now….

Cryptocurrencies like LitecoinEthereumZcashDashRipple and Monero are all gaining traction in the market….

And new players are emerging day-on-day – some more interesting than others.

Just last week Amazon – not a company frightened to wage war on new turf – registered
the following domain names: amazonethereum.comamazoncryptocurrency.com and amazoncryptocurrencies.com. Amazon already owns ‘amazonbitcoin.com’.

Is this precautionary domain name parking? Or is Amazon planning a move into the cryptocurrency sector?

Nobody knows. But Amazon’s actions highlight a potential and serve as a warning to investors that bitcoin might not always enjoy the primacy it does currently.

  • The ‘greater fool’ theory….

Chances are that most investors plunging their money into bitcoin this morning are not thinking about these issues….

I suspect that most are bewitched by stories in the newspapers about investors – big and small – making life-changing millions from speculative investments in bitcoin.

They feel like they’re missing out. They look at the chart. They see that vertical line going up, up, up. And they take the view that it will continue going that way….

They take the view that they can buy today, watch the price rise further and then sell on to some other investor coming up behind them….

It’s the ‘greater fool’ theory in action – the idea that there will be some ‘greater fool’ happy to pay a bigger price than you have paid somewhere down the road ahead….

It’s a theory that has been working and paying dividends for recent bitcoin investors….

And it will keep working too – for as long as the river of greater fools continues to flow fast and steady….

  • The water levels are rising….

Right now, that river is swollen and raging – carrying all before it. New players are entering the market in their droves.

Last week Coinbase, the largest US bitcoin exchange, reported 100,000 registered new users. Not in a year, or a month, or a week – but in a single day.

In other words, the river is getting faster, deeper and potentially more destructive with each day that passes….

I guess it’s good news for folk wading into the warm waters of the bitcoin market this morning. Those Coinbase figures suggest the supply of greater fools – fresh timber for the fire – are in plentiful supply yet.

But fools, plentiful as they are in this world, are ultimately a finite resource – like oil, bitcoins and Westminster politicians who can keep their hands to themselves in the back of a London cab….

While the supply of greater fools lasts out, the bitcoin mania (and the bitcoin price) looks set to expand – unchecked and unabated.

When the supply runs out, that’s when the fun stops and people get hurt….

How high can bitcoin rise before the fools run out or wise-up? I guess that’s what we’re going to find out.

That’s how it looks from here….

All the best,

Dave Gibson

Dave Gibson

Money Truths