When Grandma and Grandpa join the bitcoin madness, you know it s turning into a bubble

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What’s next for Bitcoin?

One day te 2013, when the price of bitcoin had crashed to $US600 from $US1,200 te a matter of hours, I wrote that this displayed that the virtual currency wasgoed a dumb investment.

Three months ago, when the price kasstuk $US5,000, I again called it a dumb investment.

So what about now, with bitcoin trading at about $US10,000?

Yes, it’s still a dumb investment. Te fact, dumber than everzwijn.

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To bitcoin’s faithful, this is a ludicrous statement. They ask: How can an asset loving a parabolic rise be a dumb investment, especially spil it is increasingly accepted by major financial institutions?

Just Thursday, the Big Four accounting rock hard PwC said it had accepted bitcoin spil payment for services for the very first time. On Friday, the Commodity Futures Trading Commission approved bitcoin futures to be traded on the Chicago Mercantile Exchange and the Chicago Houtvezelplaat Options Exchange Futures Exchange. By providing a semblance of regulatory oversight spil well spil an efficient means for shorting bitcoin, those markets could make bitcoin more palatable for financial traders by bringing it at least nominally into the regulatory zoeklicht.

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The more mainstream bitcoin becomes, the greater the risk is of a unexpected price fall. Photo: Bloomberg

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The glass half-full treatment

Other plausible rationales for a continued price rise exist. “A loterijlot of institutional investors toevluchthaven’t entered the space,” says Matthew Gertler, a Los Angeles-based analyst at Digital Asset Research, which advises investment clients on the complexities and peculiarities of bitcoin and other so-called cryptocurrencies. If thesis investors flood into the market, the price will rise.

Moreover, Bitcoin still accounts for a little proportion of global financial transactions, the worldwide stock of “broad money,” which includes notes, coins and financial accounts, wasgoed placed at $US82 trillion ($108 trillion) by the CIA spil of the end of 2016. At a price of $US10,000, the market capitalisation of the current worldwide supply of bitcoins is $US167 billion, ranking just ahead of the Venezuelan bolivar but well behind US dollars, which were valued at $US13.Two trillion. That suggests the market still has slagroom to grow.

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There are many sound theories about why bitcoin will keep going up – or crash back to earth. Photo: Rick Bowmer

Yet bitcoin bears all the signs of a bubble. Its price has run up by toughly 1,000 vanaf cent this year, reaching more than $US11,000 Wednesday before backtracking. That price seems divorced from the value of any underlying commodity – te fact, there is no underlying commodity. Its promoters talk spil however it’s destined to keep rising forever, even tho’ it’s experienced an inordinate number of hair-raising plunges since the very first exchanges began operating te 2010.

Bitcoin now has began to grab the attention of the average punter – the Wall Street Journal is running articles about grandmas and grandpas looking for ways to buy ter and students debating bitcoin overheen their Thanksgiving turkey. That’s another crimson flag that speculation may be getting out of mitt.

Bitcoin’s 2017 price rise has outpaced almost all the excellent bubbles of the past. The dot-com market ran up by a bit more than 500 vanaf cent before crashing ter 2000, Japanese stocks about 300 vanaf cent te the 1980s. Shares of the South Sea Co. – the emblematic South Sea bubble – inflated by only Ten times before crashing te 1720. The only investment craze that has outpaced bitcoin thus far is thought to be the Dutch tulip mania of the 1630s, however precies price comparisons are hard to come by.

‘Not an effortless call’

When will the bubble burst? That’s hard to know. Some prognosticators, including experts ter investment manias through history, think wij’re on the edge of a peak or even just past it, others observe that bubbles can keep inflating for months or even years before bursting.

People aren’t buying based on any fundamental skill of the product

Investment reporter Mark Hulbert

“It’s not an effortless call,” says Lorenzo Di Mattia, manager of a global hedge fund at Sibilla Capital Management and an aficionado of investment manias of the past. Compared to the timeline of the dot-com bubble of the late 1990s, which ended te tears ter 2000, he says, “the question is where wij are – te 1997, or the beginning of 1998 – or 2000.” But he believes it’s “too early to call an end to this.” The Nasdaq market bubble inflated for about four years before its crash, after all.

The Nasdaq market, however, encompassed not only unprofitable dot-coms erected on speculative quicksand, but also companies such spil Microsoft and Intel – “real companies,” Di Mattia says. “This is nothing,” he says of bitcoin. “This is air.”

That points to the most significant question about bitcoin: What is it? Boiled down to the essence, it’s the product of a mathematical algorithm that’s designed to limit its supply to 21 million virtual coins (the supply presently is 16.7 million). It’s not backed by a specific asset such spil gold or treasury bonds, or by a central bankgebouw. To its ventilatoren, that independence from government control – indeed, any centralised control – is its greatest virtue because that’s what makes it immune from deliberate devaluation by central banks hoping to prop up their national economies.

But to others, that’s a fundamental flaw. Te approving the futures contracts, Commodity Futures Trading Commission Chairman J. Christopher Giancarlo warned that most bitcoin activity will still take place ter “largely unregulated markets.” He warned of a “high level of volatility and risk ter trading thesis contracts.”

Today, bitcoin functions spil both a quasi-currency and a speculative investment voertuig. But the excitement among investors generated by its rapid appreciation this year undermines its value spil a currency.

“A currency that appreciates too rapidly is eliminating the main purpose of its existence,” observes Howard Wang, co-founder of the research hard Convoy Investments – people will spend money only when they perceive its value spil stable, otherwise they’ll hold onto it te expectation that it will be much more valuable tomorrow. Spil recently spil last year, some retailers were attempting to attract customers by advertising that they accepted bitcoin at the tegenstoot. Now, Wang says, “nobody is talking anymore about using bitcoin to buy pizza, only about how they can make money ter it.”

Novices should be ‘toegevoegd careful’

But its massive volatility eventually may work against its popularity spil an investment. Just after peaking above $US11,000 this week, bitcoin experienced a almost 20 vanaf cent druppel te a matter of hours. That’s not all that extreme for bitcoin, but for any other investment, it would be regarded spil frantically excessive. The 1929 stock market crash took the Dow down more than 25 vanaf cent ter four days and wasgoed accompanied by a worldwide depression.

If you find the particulars of bitcoin hard to understand, you’re not alone. That’s another feature of the bitcoin investment market that has some experts jumpy. “What happens te thesis bubble-ish areas is that you get people trading who most likely shouldn’t be and who don’t understand it,” says J.J. Kinahan, chief market strategist at the brokerage rock-hard of TD Ameritrade. “If you can’t define what the product is, you might want to be reserve careful.”

(To use bitcoin, you establish a “wallet” through a bitcoin hard, pack it with bitcoins purchased with whatever currency you have on mitt and then you can convert them into a different currency when you wish. Thesis transactions are online, so the asset values can shoot all around cyberspace without touching solid ground.)

Even vooraanstaand bankers find it hard to get their arms around the bitcoin principle. “I don’t personally see any value te something that has no actual value,” Jamie Dimon, the chairman and CEO of JPMorgan Pursue, said at an international finance conference te October. “I could care less what bitcoin trades for, how it trades, why it trades, who trades it. If you’re stupid enough to buy it, you will pay the price for it one day.”

That judgment may have bot unnecessarily harsh. The principle underlying bitcoin, known spil blockchain, is finding uses ter finance and other applications – it’s a way of keeping a transaction ledger that can’t be secretly altered and remains out of the control of a single entity, enhancing trust te the record.

For now, the rise of bitcoin seems divorced from any fundamental rationale. Investors who bought te before, say, midyear 2017 have made so much money te the market that they could weather a crash of even 40 vanaf cent and still be te the black. Those who have bot enticed te at the current stratospheric prices may be living on a knife edge, however.

“People aren’t buying based on any fundamental skill of the product,” says Mark Hulbert, an investment reporter who this week placed the chance of a crash at better than 80 vanaf cent.

“They’re just interested because they see it going up.”

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