It seems like everywhere you go, Bitcoin is the talk of the town.
On December 11 we saw CBOE (Chicago Board Options Exchange) process $50+ million worth of Bitcoin futures contracts as Bitcoin volume surged past $14 billion. Media hype is increasing and as the spotlight increases on the future of Bitcoin, increasingly people are deciding it’s not too late to jump on the Bitcoin bandwagon.
Online trading platform, Coinbase saw 300,000 users join in one week alone, even surpassing YouTube, Facebook, and Instagram to take out the Apple app store’s top position.
But where is it heading? What are the signs telling us?
Lecturer in financial planning at Griffith University Business School, Dr Katherine Hunt is someone who knows the five stages of a bubble and crash. In an episode of Business Briefing, Hunt goes through a recognisable pattern that bubbles and crashes tend to follow.
She begins by saying that the stock market (or crypto-currency market in this case) is basically a manifestation of the psychology of every single person who is investing, and so of course there is going to be these crazy stages.
Listen to Katherine speaking about the five stages of an investment bubble and crash here:
The 5 stages of a bubble
This was identified by economist Hyman P. Minsky in his theory of financial instability where the general pattern of a typical credit cycle followed the five characteristics mentioned in the above audio.
A new paradigm enters the environment and investors are hooked to this innovative new technology or system.
Media coverage starts to ramp up and the new paradigm gains momentum. More and more people enter the market as prices are still relatively low but rising slowly.
In the third stage, everything looks amazing. Prices skyrocket, valuations reach extreme levels which then triggers experts to throw caution to the wind.
- Profit Taking
Here we see the smart people swoop in to start taking some profits while the going rate is hot. Once that happens, we enter a fast slope towards panic.
In the final stage, we begin our decent and asset prices reverse course. The last phase of a crash is felt more than the elation of the price rise. And of course, panic breeds more panic and the price falls.
Hunt sees similar pattern playing out today. The big players such as Airbnb, Uber and perhaps Bitcoin are only a few of their kind, but believes it can’t last forever. These companies operate in an open market so competition is inevitable. These companies will face competition and challenges and their values will fall one day. The biggest question is when.
How the financial industry is reacting to the BITCOIN MANIA
There has been a spike in interest over the last month with investors and including SMSF trustees enquiring about adding Bitcoin and other cryptocurrencies to their portfolio. Below is a grab of the searches in google. We can only assume that this will increase in the new year.
So, how do your fellow FINANCIAL ADVISERS feel about the crypto craze?
The following excerpts are not intended as personal advice. We have not taken into account any particular person’s objectives, financial situation or needs. Before acting on any information, you should consider the appropriateness of this information having regard to your personal objectives, financial situation or needs. We strongly recommend you obtain financial advice specific to your situation before making any financial investment or insurance decision.
Mark Beveridge from Quill Group had one of his clients enquire about adding Bitcoin to their portfolio.
“I’ve been keeping an eye on my mate’s recent investment in Bitcoin. He’s doubled his investment of $36k to $72k in two weeks but it is highly volatile. What are your thoughts?”
“It could go to any price, as there is no real fundamental value, only a supply that is limited by the cost to mine a new Bitcoin.
So, it could go to $100,000 per coin, who knows. Please note that futures exchanges are starting to create and trade contracts for Bitcoin which could introduce a new wave of speculative buying. But at the same time, it also will make it much easier for big players to crush the price if/when it turns lower.
I look at this and other crypto’s from this simplistic position: What is it used for?
- It originally started as a means of anonymous transactions and used a lot in the ‘dark web’.
- It has very little use as a traditional currency, to pay your rent, or buy groceries.
- I can’t borrow Bitcoin at 3.75% to buy a house.
- I don’t want to pay my staff in Bitcoin, as my wages bill could double next week.
- I don’t want to be paid in Bitcoin, as my salary could halve in a week.
- Transactions, while anonymous, cost more than the free transactions I get in my Australian dollar currency account.
- The banks I deal with have never lost any of my AUD currency, unlike those who lost millions in the Mt Gox (Bitcoin exchange) collapse.
So, to me, it’s only use is as a speculative instrument. Never put money that you can’t afford to lose into a speculative venture. For a real-life story of something similar, read about the South Sea Bubble and Tulipmania.”
Recently Financial Planner and Mortgage Broker at Wealthful, Chris Bates weighed in on Bitcoin via LinkedIn. As Chris normally does, he got a bunch of comments and reactions. He too made reference to the South Sea bubble and Tulipmania Mark referred to above.
“It’s clear, there are billions, probably trillions on trillions of dollars in the world that want to have an easy way of floating around the world without thirsty banks getting involved. It’s clear crypto currencies will be part of our lives forever, they are not going away. It’s undoubtable that the returns are astronomical. It’s true that the technology has changed the game. It’s crazy to think it’s going to be the last or the biggest cryptocurrency.
I don’t confess to be a Bitcoin expert, but I’m sure most people buying it are clearly not. The temptation to make money is too great for some people. People want overnight success, lotto and pokies exist because of it. True bubbles happen when they only make true sense after they crashed. Tulip Bulbs, South Sea Company, Dow Jones 1929, Dot Com 1999, Bitcoin 2019.
Bitcoin may prove me wrong, and those that invest right. But who’s to say the technology does not get better and 1,000s of new currencies come to leave Bitcoin bleeding #lookbutdonttouch.”
Grab some popcorn and enjoy the comments: https://www.linkedin.com/feed/update/urn:li:activity:6344241429220552704
Now, the world sits and watches it unfold
There is no doubt in anyone’s mind that Bitcoin is playing its role in the digital transformation of what was once a dominated and institutional controlled financial system. But Bitcoin is being hampered by its own extreme volatility. As mentioned above, at this point in time, mass adoption of Bitcoin as an everyday currency seems less likely by the minute. RBA governor Philip Lowe has also just said that Bitcoin is a ‘speculative mania’ with no future for everyday payments.
The currency can fluctuate by more than 10% day to day. Stability is needed if consumers are to use this for purchases or as a store of value like gold has traditionally been used for. If or when this stability occurs in the future, advisers may need to seriously consider whether this new class of assets – cryptocurrency – should be included in their future client portfolios.
It will be interesting to see how this alternative to conventional financial networks evolves. Will it be a Rocky style blockbuster in the making, or is it a crypto Titanic destined for a deep-sea dive into the dark waters.
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