MENU
 Registered users can save articles to their personal articles list. Login here or sign up here
 
  9 COMMENTS

  Here is a smile thought...or concern...Anyone, even the highest Cripto bidder, will admit Cripto currency is in fact a nonsensical, nil value, non back-able, non existing Bull dust currency, which sta...  

 Registered users can save articles to their personal articles list. Login here or sign up here

Bubble trouble: Are you a bitcoin believer?

What bitcoin has to do with tulips and ostrich feathers.

Bitcoin mania is in full swing and investors around the world are getting caught up in the hype. Unfortunately, investor frenzy is never a great predictor of future returns, especially for those who are late to the party. The lure of investment gold at the end of the proverbial rainbow is so powerful that many speculators do not apply rational investment principles when making investment decisions about bubbles. 

What is a bubble?

A bubble occurs when there is so much hype around an investment, that speculators drive the price beyond any rational value. All bubbles are different, however they all follow a certain pattern. According to economist Hyman P. Minsky, there are five steps to a bubble:

  1. Displacement – a displacement happens when investors become obsessed with the latest “in thing” that promises to make them rich.
  2. Boom – prices rises slowly, but then gain increasing momentum as more investors enter the market. During the boom phase, the asset attracts widespread media attention which increases the fear of missing what could be a once-in-a-lifetime opportunity.

(If you do a search on Google on “Bitcoin Bubble,” you will find almost 700 000 results)

  1. Euphoria – valuations reach extreme levels during this phase

Bitcoin is now selling for $2 514/Bitcoin (at time of writing), whereas five years ago it was as little as $5.

  1. Profit taking – during this phase, the smart investors realise it is just a matter of time until the bubble bursts, they sell out and bank profits.
  2. Panic – in the final stage, asset prices descend even quicker than they rose as speculators start panicking.

Some early bubbles

Tulip mania

The tulip bubble began in 1633 and burst in 1637. At the peak of the bubble a single tulip could be traded for an entire farming estate, in one month, the price of tulip bulbs rose 2 000%! Once the bubble burst, a tulip was the same price as a common onion. 

Ostrich-feather bubble

The ostrich feather boom took place between 1890-1914. This was driven by fashion as the feathers were primarily used to decorate hats. At one point, you could get more money for 1kg of feathers than 1kg of gold. The boom ended in 1914 and was blamed on Henry Ford and the arrival of the first motor car. Ladies were not able to wear their elaborate feather hats in cars that had roofs, and so the demand for feather hats collapsed. 

What does bitcoin have to do with tulips and ostrich feathers?

There is no doubt that blockchain technology and cryptocurrencies could have a massive impact on all forms of business, especially financial services. However, this does not guarantee that bitcoin will be the first choice as a store of value. It is very difficult for proper investors to consider an asset than can appreciate by 180% in 6 months. Similarly, bitcoin has lost more than 80% on a few occasions causing serious investors to allocate very small amounts of money to bitcoin and only as a form of speculation. In June 2016, bitcoin’s market share of all cryptocurrencies was 81%. In one year, it has dropped to 41%. This drop is not due to Bitcoin’s price decreasing, as shown below, the price has skyrocketed since 2013, instead it is due to other cryptocurrency competitors growing more quickly. In comparison to the younger cryptocurrencies, bitcoin is slower and more limited.

 

Change in bitcoin value

Source: blochain.info

 

‘We learn from history that we do not learn from history’ (George Hegel)

One of Warren Buffet’s pearls of wisdom is to only invest in what you know. How many investors in bitcoin understand what bitcoin is and how it really works? Apparently, there are only a few hundred people in the world with such skills and for many, bitcoin continues to remain a mystery. If you don’t understand your investment and you are buying when there is a state of euphoria, tread very carefully, you might be the last buyer at the highest price.

More stories from Moneyweb
Laurie Wiid

Laurie Wiid

NFB Private Wealth Management
Moneyweb Click an Advisor
   9 comments

To comment, you must be registered and logged in.

LOGIN HERE

Don't have an account?
Sign up here

The blockchain is a powerful new invention that will have a positive impact on commerce and personal freedom.

All cryptocurrencies are currently merely “receipts” or tokens that resembles the currency that purchased it. A common cheque can be exchanged at the bank for money, it is backed by money in the bank. If you have no funds in the bank you can still pay by cheque and transfer the risk of non-payment to the seller.
Now a bitcoin is a cheque made out to you, without an amount written on it. The person who eventually buys your bitcoin, writes the amount, or value in the blank space to determine what it is worth. Not only does this cheque have no value other than trust, there are no funds in the bank to back this cheque, because bitcoins are backed by nothing.

Now we get to the point- you want to sell your car and the anonymous buyer, offers to pay with a blank cheque- will you accept it as payment? Now why do you still want to pay for a bitcoin?

Unlike Tulips and feathers, there is a limited supply of Bitcoin. Also, Bitcoin is a utility for the Internet Economy. I think it is unwarranted to compare it to a flower.

Whats the golden rule dished out to greedy investors with too much money ? If it sounds too good to be true it is too good to be true.
$5 to $2514 in 5 years! Are you not hearing the alarm bells. If you want to cash in your Bitcoins and your computer tells you sorry, there is a technical problem, who you gonna call ?

Investing in a company with no assets is like paying for free air…..The bubble will burst and then people are dumbstruck how they lost all their savings. All the hall marks of a Pyramid scheme except this one has limited seats for now.

Just another ‘’mystical miracle’’ promise, Sharemax style….

Anything that ‘’sounds too good to be true, usually is’’.

I also think that well-known local economists who sings the Bitcoins praises should be very careful as the historical price volatility and the perceived volatility for Cyber currencies is still very contentious and unknown, save to say that your savings could be wiped out without any hedging protection!

‘’Money is only a tool. It will take you wherever you wish, but it will not replace you as the driver’’ – Ayn Rand.

I 100% agree that Bitcoin and more specifically some of the “alt-coins” are in bubble territory and will pop, however BTC unlike flowers and feathers have actual use cases.

Yes bubbles pop but that doesn’t mean the underlying product is rubbish. Amazon went from $1.5 to $107 back to $6 during the .com bubble. And we all know how what a failure Amazon is today…o wait 🙂

Amazon is a real company who valuation represents the market’s view of the sum of future dividends discounted back to today. The dotcom bubble’s high price and eventual bursting and recent rising again is/was simply the market trying to find out what that income stream was going to be worth. The volatility is because internet businesses were new and success hard to predict.

Bitcoin has no intrinsic value nor will it ever have any dividends. It is a technical mechanism for payment. There is no reason I can see why its value should dramatically shoot up except because it is a bubble where people buy it merely because they expect others to later also but it to push the price up. It will burst.

Kinda silly example tulips and feathers and comparing them to bitcoin. And I see the sceptics saying its a bubble that’s popping. My journey is now 2 years in bitcoin and the crypt currency world and I’ve see it go to $1000 and check back to 700 and everyone saying its about to go to zero and alas it went to $2600 USD. So an upgrade is happening to bitcoin so that it can do more transaction per 10 min and this is why there is price volatility and why btc went down to $1900 in 3 days. Check back now it’s back up to $2100 and steadily climbing as segwit is being implemented across the network, so far without a hitch touch wood… Intrinsic value of bitcoin is no different to the intrinsic value of paper money that is no longer backed by gold… Rather it’s backed by governments, and we all know how well they all doing around the world. At least bitcoin is backed by its users who determine price of its characteristic of being a medium of exchange governed by free market… Let’s see if it’s a bubble of air or a bubble of substance

Here is a smile thought…or concern…Anyone, even the highest Cripto bidder, will admit Cripto currency is in fact a nonsensical, nil value, non back-able, non existing Bull dust currency, which started from and will end in a nil.
However, it is in fact probably as significant as the discovery of Black Holes, and just as destructive. It will ultimately replace world currency and cause the total collapse of the global financial system…which some theologians may even want to agree with….”at that time you will throw your money (and Cripto which never really existed) into the streets”.

Latest Currencies

ZAR / USD
ZAR / GBP
ZAR / Euro

MONEYWEB NEWSLETTERS

Subscribe to our mailing list

* indicates required
Moneyweb newsletters

Podcasts

Moneyweb Investor Issue 26

Yes, recession is stifling the economy and dirty politics darkens our discourse, but that is today. There are those who are planning for a better, brighter tomorrow. We talk to Chris van der Merwe, founder of Curro, about how he plans to transform tertiary education for the greater good with his new company, Stadio.

Follow us:

Search Articles:Advanced Search
Click a Company:
server: 172.17.0.2