Month: October 2017

Forever Blowing Bitcoin Bubbles

Forever Blowing Bitcoin Bubbles

BitBubbles

Let’s get this clear – bubbles tend to be round so it’s absolutely futile to predict the top of a bubble.

So how do bubbles work? A trip down memory lane willl serve as a good starting point. When you were a child you blew bubbles – if you achieved the precise mix of fairy washing up liquid with water you could create killer bubbles which would blow for what felt like miles.

 movie film dream bubbles the abcs of death GIF

Investment bubbles act in a similar way. If the correct combination of monetary and fiscal conditions collide and you throw a new era story into the mix then bubbles can grow extremely large. We are certainly in the Goldilocks zone when it comes to bubbles.

First lets define bubbles:

“An economic bubble or asset bubble is trade in an asset at a price or price range that strongly exceeds the asset’s intrinsic value” – Investopedia

So we need to understand bitcoin’s intrinsic value – Buffett gives a masterclass on valuations so what does he say?

“You can’t value bitcoin because it’s not a value-producing asset.”- Buffett, 2017.

Mediums of Exchange

Spot on. But does that mean that bitcoin has no value? What about precious metals then? They aren’t value producing assets and yet they have a total valuation in the trillions! The value of all gold in the world as of today is:

$7,717,794,248,337

Almost 8 trillion dollars for those of you who struggle quantifying the above.

Precious metal values comes from nothing less than their efficacy as a medium of exchange – as a form of money. It may sound weird at first, or perhaps tautological, to claim that gold is valuable because it can be used as value, but this is precisely the point. So bitcoin sits in this category of assets.

Incidentally Buffett doesn’t recommend buying Gold either for the very same reason. That doesn’t make a dint in that $8 trillion valuation though now does it? Buffett also states that there’s no telling how far bitcoin’s price will go and described it as a “real bubble in that sort of thing”. Lets try to quantify the opportunity here.

Valuing Bitcoin using comparatives

Investopedia tries to estimate bitcoin’s value on the basis that it is a medium of exchange here. In short form they state that the total estimate for global value of mediums of exchange and stores of value comes to 72.1 trillion US dollars. If bitcoin were to achieve 15% of this valuation, its market capitalization in today’s money would be 10.8 trillion US dollars. With 21 million bitcoin in circulation, that would put the price of 1 bitcoin at $514,000. That would be over 1,000 times the current price.

Predict the top at your peril

Andrew Williams, a Schroder’s Investment Specialist has charted bitcoin against a commonly known bubble chart. As an institutional investor himself he should realise the error in his ways. The stealth phase includes smart money, awareness phase includes institutional investors, mania phase includes the rest of the public. How many institutional investors are/ have been invested? very few. So how can we be at the blow off phase based on his graph?

This chart would therefore suggest that we are entering the awareness phase. It’ll be a matter of time before institutional investors can trade bitcoin derivatives and, as per behavioural economic theories, institutional investors will become invested when their clients demand an explanation as to why they’ve missed the 600% increase in bitcoin. Followed shortly after by the hardcore skeptics.

Indeed, bull markets are fueled by successive waves of prior skeptics finally capitulating as their fears fade. Eventually, fear turns to euphoria, and that’s the stuff of bubbles. -Kenneth Fisher

Prit Kallas charted the exact same thing in April 2013 for bitcoin. At first I thought it represented the peak at the end of 2013 on the chart above but no! It’s the much smaller peak at the start of 2013 when the price was $225. If only Print invested $1,000 back then – he’d have over $25,000 today.

It’s also worth reminding ourselves that the value of the dot com boom was a round $7.3 trillion. 47 x greater than the value of all cryptos today. History demonstrates the potential meteoric rise of such bubbles.

Bitcoin Bubble Graph Compared to DotCom Crash

Bubble upon Bubble

So let’s now look at a chart by Paul Gordon which looks at the chart of bitcoin using fractal Elliot waves. Paul quite rightly points out the many times bitcoin has experienced such a pattern in the past. This is where we were in Jan 17 if such a price rise repeated itself as it has many times before… interestingly his forecast wasn’t too far off by Nov 17. He also quite rightly states that past results are by no means extrapolatable to future results.

Credit: Paul Gordon

Another perspective I like is this non-linear logarithmic chart which is based on Metcalfe’s Law.

Metcalfe’s law states that the bigger the network of users, the greater that network’s value becomes. Bitcoin might look like a bubble on a simple price chart, but when we place it on a logarithmic scale, we see that a peak has not been reached yet.

The perfect bubble concoction

As stated earlier, when you get a good mix of loose monetary policy and loose fiscal policy you get strong bubbles. The crypto bubble has the strongest combination of fairy liquid and water possible.

Cyptocurrencies are a direct rebellion against the very policies that are supporting it. Bitcoin cannot be printed to infinity unlike fiat currencies and banks cannot control its users which is one reason why it appeals to its buyers. It’s almost as though the lack of trust in the elites and banking institutes which is playing out at the voting polls is also causing this break away assets price to rise. Even daily mail readers know that most asset prices are being inflated by the central bank’s ZIRP. The price of bitcoin is therefore self-fulfilling as people become more distrustful.

An asset price crash is probably a few years away (read here for my reasoning) and everyday that goes by reduces the chances of bitcoin going to zero as more venture capital pours into the infrastructure around the tech. The economic conditions are ripe for a bitcoin melt up.

Hypocrypts

The people who criticize cryptocurrencies the loudest seem to see that crypto has a long way yet to grow. JPMorgan Chase CEO Jaime Dimon called bitcoin “stupid” and a “fraud,” and yet his firm is a member of the pro-blockchain Enterprise Ethereum Alliance (EEA). Quite hypocritical if you ask me. Russian president Vladimir Putin publicly said cryptocurrencies had “serious risks,” and yet he just called for the development of a new digital currency, the “cryptoruble,” which will be used as legal tender throughout the federation. Cryptocurrencies are here to stay – how the decentralised currencies become regulated is the question on everybody’s lips. 

Personally, I don’t believe GOV et al are ready to relinquish their grip on society. 

Still, Follow the money.

Personal opportunity cost to date – £93,000

I first heard about and thought bitcoin was a bubble at £53 in 2012. Assuming I understood the opportunity here and was as convinced about the tech behind the blockchain then as I am now, I would have happily forked out £1,000 for 19 bitcoins. I’d now be able to put a hefty deposit down on a house at £93,000. Many people are probably doing similar retrospective calculations.

Perhaps I should purchase a Bitcoin as a practical lesson on bubbles.

My FOMO and the fact that I can afford to lose out quite possibly marks the end of this bitcoin bubble. Or is it the start? Who knows because bubbles are round and can pop at a moment’s notice…

Image result for bubble pops gif