What caught my eye this week.
People are increasingly reluctant to call bitcoin’s parabolic rise a bubble. With the price hitting $11,000 this week, those who dismissed it as a fad or a fraud at $100 look like idiots.
Those who own bitcoin get it. Those who don’t are antediluvian relics.
There’s nothing like a profit to turn people into prophets.
For what it’s worth (not much) I think bitcoin is in a bubble. Probably.
I’ve spent some time this year trying to understand bitcoin, cryptocurrencies, and blockchain – the distributed ledger technology that drives them – better.
I think I’ve succeeded. This summer I had a eureka moment when I finally got that bitcoin was a financial architecture as much as it was a currency or a store of value, and that owning some meant investing in that platform.
I even thought about buying a little. Alas, bitcoin had just hit $2,500 and I’m cheap.
So I didn’t.
Oops!
Having nerdy friends from my university days means bitcoin bubbled into my consciousness years ago. I even have the archetypal friend who mined them when you could do so without a liquid nitrogen cooled garage full of Chinese programmers.
My friend used his self-mined bitcoins to buy an Apple iPad.
Oops!
Eleven reasons why the price of bitcoin may be a bubble
I’ll spare you a primer on the technology (plenty exist – see the links below). Instead here are some random thoughts as to why I think it’s probably a bubble.
1. This graph
Source: WSJ [1]
There might be another widely traded security that has gone up like that and not come down. But I can’t think of it.
2. It’s too volatile to be a currency
A useful currency can’t go up and down 20% against the dollar in 24 hours. If it’s not (at least partly) a currency, then what (partly) is it? If it is a currency then it will have to stabilize. Have we happened upon the right price, right now? Seems unlikely. Are prices going up because they can? Seems likelier.
3. Its ascent is being talked about everywhere
Everywhere! Great sign of a bubble.
4. Seriously, even my girlfriend told me about her bitcoin
I’ve yet to see a woman quoted in an article about bitcoin, which does weaken the bubble case (it might suggest there are still huge demographics to be pulled in). Perhaps it’s begun, though. Plenty of women are into investing. Many are even readers of this blog. My girlfriend is neither. Yet this week she – well – boasted about the value of a fractional bit of bitcoin she picked up along the way. She’s never talked about shares, ISAs, bonds, interest rates, pensions – not even property prices.
5. The overnight wealth creation seems to defy common sense
At $11,000, bitcoin has a market cap [2] of $185bn. Is it reasonable that $185bn has been magicked out of nowhere just because sufficient people believe their bitcoins are worth $11,000 a pop? Perhaps it’s not so ridiculous. Fractional reserve banking means High Street banks add to the money supply all the time. Or is it so different from a stock market being worth 1% more today than yesterday? While $185bn is a big number, it’s a tiny fraction of the world’s wealth. On the other hand, surely that valuation should be tethered to, well, something? States and fiat currencies at least have armies and taxes. And gold [3] has rappers’ teeth. If bitcoin really is on its way to becoming a hybrid of gold and the US dollar, then I can just about accept its rapidly created market cap, except…
6. Governments will want a piece of the action
The bitcoin market is unregulated, and the bitcoin network is creating a store of wealth without governments getting any. Until governments are fully involved, I think the price can’t be trusted. What’s to stop them banning it? Fine, they’d fail, but is the average citizen going to risk breaking the law for an illicit floating world currency – let alone the average billionaire?
7. The price is self-limiting
The higher the price of bitcoin climbs, the less likely people will want to spend their bitcoins. Can it function as a currency then? Hmm, I say. It could still be a store of value though.
8. There are questions about the technology
Initially touted as incorrigible, the cryptocurrency has been splitting [4]. Just keeping the show on the road already consumes as much energy as Ireland [5]. Then there are the hacks that shake faith in a digital currency much more than a bank heist. (Although really stealing bitcoins from a digital wallet or store is just the same. The integrity of the blockchain is the important thing.) Questions about technology don’t mean it’s necessarily a bubble – and they don’t mean it (or blockchain) won’t succeed. Rather, this could be the equivalent of a video-on-demand Internet service in 1999 – right idea, wrong time. But for me these issues do make it harder to trust the price action.
9. Initial coin offerings
Do you know about ICOs? They are unregulated funding rounds for would-be the next bitcoins that have raised more than $3bn globally [6]. Pretty much on the back of napkins. There’s now an estimated 1,200 [7] new digital crypto-currencies out there. On the one hand they might seem to validate the concept – even the failure of all but a couple to gain traction might support the rising price of bitcoin, because it has gained traction. But on the other hand… really? Doesn’t this seem a little, well, nutty? Just a bit?
10. Company name changes
Companies are changing their names to mention bitcoin and seeing their valuations soar. (Here’s a British example [8], and a US one [9]). Again, not slam dunk proof, but we’ve seen this movie before. Famously, adding ‘dotcom’ to a company name in the late 1990s spiked the price. More recently, I recall a tiny UK music technology firm that changed its name to something to do with rare earth mining at the top of the commodity cycle. At least, it suggests a speculative aspect at play.
11. I’m writing about it
I’ve mostly tried to keep cryptocurrency off this site because it just seemed too iffy. But here I am, adding my two pence worth. When the last blogger turns, you know a bubble is upon us.
True, some telltale signs are missing. For example I haven’t yet heard of babies named Bitcoin or Ethereum. [Update: Reader E. wrote to let us know that baby Bitcoin [10] was recently born and named in the Crimea.]
Football managers are also getting in on the action [11].
A bubble does not mean a permanent bust
To end on a hypocritical ass-covering note, I’m not really sure bitcoin is a bubble.
It looks like one, smells the same, and has a letter from its mum. But occasionally the world does change. Perhaps this is one of those times.
I’m also not calling a top. Bubbles can keep climbing for years, and it’s easy to see more catalysts for bitcoin.
Think back to how the first exchange traded gold funds seemed to stoke that boom. Bitcoin futures will arrive in a couple of weeks [12], and I suspect ETFs will follow.
If bitcoin ETFs track the price by investing in bitcoins (rather than synthetically [13]) then they’ll surely boost the price, at least initially. It’s still a hassle to buy bitcoin, compared to adding some alongside your trackers and bond ETFs on Hargreaves Lansdown [14].
Millions more punters could flood in and send the price skyrocketing! Or the ETF-afication of bitcoin could strip it of its mystique and the price could crash. Who knows?
A price collapse wouldn’t necessarily mean the end of bitcoin or blockchain, any more than the bursting of the dotcom boom halted the Internet.
Bitcoin could go on to be a household name for the rest of our lives, something we all might use. Perhaps it is the future of currencies? Maybe it is a new store of value?
It seems unlikely that blockchain technology will go away anytime soon – it’s too easy to think of applications. (As a would-be home buyer I’d love all the information pertaining to my potential purchase to have been recorded and distributed for everyone to see. It would save hundreds of emails, dozens of letters, and a wodge of money).
But bitcoin right now?
If it walks like a duck and talks like a duck, it’s a duck.
And Bitcoin is probably a duck.
I mean a bubble.
- Good Bitcoin primer (with more at the bottom) by Bloomberg Business [15]
- This Motley Fool podcast [16] is another excellent introduction [Podcast]
- Patrick O’Shaughnessy’s superb Hash Power series [17] goes deep [Podcast]
- Smart take on the mania aspect – The Reformed Broker [18]
News
Note: Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber.1 [19]
RBS to close 259 branches – Guardian [20]
Tenancy overhaul in Scotland hailed as new dawn for renters – Guardian [21]
UK housing stock tops £6tn for first time – Hargreaves Lansdown [22]
UK consumer credit growth falls to 18-month low – Guardian [23]
Goldman Sachs warns valuations are at their highest since 1900 – Bloomberg [24]
Under-performing Neil Woodford also sees a bubble – Telegraph [25]
Budget reveals the savings ratio crashing towards 30p in £100 – ThisIsMoney [26]
[27](Click to enlarge)
Wind and gas already beat coal on cost in US; solar close behind [PDF] – Lazard [28] (& WSJ [29])
Products and services
P2P platforms rush to launch innovative finance ISAs [Search result] – FT [30]
First time buyers: Use stamp duty drop to reduce your mortgage rate – ThisIsMoney [31]
Fee-free mortgage deals could cost more than you think [Search result] – FT [32]
How does your bank’s app score for useful features and safety? – ThisIsMoney [33]
Fidelity puts numbers on its innovative variable fee fund – ThisIsMoney [34]
New secured retail bond to pay 5.25%, but there are risks – Telegraph [35]
Electric cars are cheaper to run than petrol or diesel (with subsidies) – Guardian [36]
How to buy a perfect Christmas tree and when to put it up – Guardian [37]
Five ETFs that deliver an income – ThisIsMoney [38]
Comment and opinion
This record low volatility is setting us up for a fall – Econompic Data [39]
The problem with performance-based fees – The Evidence-Based Investor [40]
Rich People’s Problems: How to survive being fired [Search result] – FT [41]
Destroy debt quicker: An easy and painless way to be more free – Financial Samurai [42]
The downside of early diversification – Kitces [43]
Markets don’t exist in a vaccum – Tony Isola [44]
The FTSE 100 looks fair value – UK Value Investor [45]
Getting your financial shit together is an emergency – The Escape Artist [46]
John Kay on the meaning of the market [Podcast, three weeks old] – CapX [47]
FIREhub.eu is a new aggregator of European financial blogs – FIREhub.eu [48]
Even a passive Vanguard investor is a factor investor – Alpha Architect [49]
Using options to stay invested in a pricey market [Podcast, for nerds like me] – Meb Faber [50]
Off our beat
Taking back control [On Brexit] – Simple Living in Suffolk [51]
Why 45-54 year old men are grumpy [US, but relevant to UK I suspect] – New York Times [52]
“They don’t tell you why”: Threatened with removal after 52 years in the UK – Guardian [53]
And finally…
“The main reason I invest is for the lifestyle and my hopes for the future. I am not talking about caviar or a nice house in the Caribbean. The stereotypical investor is usually summed up by things like that, but my experience has shown me the opposite is true. All the amazing investors I have met over the years share three traits: humility, frugality, and nerdiness.”
– (15-year old) Maya Peterson, Early Bird: The Power of Investing Young [54]
Like these links? Subscribe [55] to get them every Friday!
- Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”. [↩ [59]]