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Bitcoin bubble – is it time to get out?


Wall Street’s resident bitcoin buff Mike Novogratz has moved his target price for bitcoin to $40,000 by the end of 2018. He has said that not only is this a bubble, but it is a bubble that is only going to get bigger. He argues that this is because of the global nature of this unique asset.

As bitcoin passed the $17,000 barrier analysts in the City of London marveled at its continued rise.

“The madness of crowds is well documented, but it is quite something to behold in the flesh,” says Neil Wilson, Senior Market Analyst with ETX Capital. “There are no fundamentals of technicals that explain this other than it being a massive speculative bubble. First we had the displacement resulting from a disruptive force in the market – in this case the blockchain technology. Next is the boom when the smart money moves in, which is followed by the euphoria phase as everyone rushes in to get in on the action for fear of missing out.”

After this of course we will get the profit taking, as the smart money moves out, and finally the panic. The big question is whether we are still in the boom phase, or whether euphoria has set in. Investors already in bitcoin will be asking themselves – “When should I get out?” Wilson says that while this looks like a classic bubble, bitcoin could still have a lot longer to run.

“Whether it is indeed a bubble or something else entirely remains to be seen,” comments Mati Greenspan, Senior Market Analyst at eToro. “What I can tell you from conversations with my clients is that more and more people are starting to see bitcoin as money and the potential to replace the current fiat central banking system that has gotten out of hand.”

Greenspan rightly points to the network’s ability to process transactions in a timely fashion. There have been times of congestion in the bitcoin market that have obstructed price rises. For example, yesterday morning there were over 50,000 unconfirmed transactions waiting to be processed on the bitcoin blockchain. Although 50,000 transactions is not incredibly large, and not as long a queue as we have seen earlier in November, this figure does have the potential to rise quickly. Some investors may be put off if they have to wait hours or even days to buy bitcoin.

“Perhaps they’ll be patient and continue to buy in, but there’s a real chance that if we do see congestion and if it seen as a weakness, it could possibly spark the pullback that many seem to be waiting for,” says Greenspan.

We would look at this problem from the other side of the…er…coin. What happens if everyone is trying to get out of bitcoin at the same time? If it can take days to get in as interest accelerates, how long will it take to take out? Our experience with classic bear markets – e.g. the stampede out of highly illiquid Asian stocks in 1997/8 – is that the rush for the doors can place far more liquidity stress on a market than the entry.

Assets usually grow in value because of a reason – either there is practical demand for the commodity that is fueling demand or there is a growth in the underlying value of something like a share – e.g. the company is becoming more profitable and there is the prospect of higher dividends. We have always felt that there is scope for something to replace national currencies, which are increasingly starting to look like a 20th century anachronism. Blockchain seems to be laying the foundations for a new global currency to emerge. But will it be bitcoin?

We think that bitcoin has entered a speculative phase now. Previously buyers were purchasing it because there was a significant and practical need for the currency. Now the focus is on just making money from the price of a rising asset. Bitcoin’s adherents will argue that this time it is different, but it is never different. It was not different when they were buying tulips in Amsterdam or shares in the South Sea Bubble. People don’t change. Bitcoin has yet to be tested in the fires of a big sell off and this will be a severe trial for the technology that underpins it.

If you think bitcoin is looking too toppy, take a look at Litecoin. Its rise has not been as impressive as bitcoin, but eToro’s Greenspan reckons that “its protocol is better, making it a more sustainable option for payments and an excellent addition to any alternative investment portfolio.

Bitcoin fell by $2,500 on 8 December after hitting a high of around $17,000 on Thursday. This was a huge drop.

“This correction is an appropriate one after such frenzied trading,” comments Nigel Green, founder and CEO of dVere Group. “We should expect to see bitcoin see-sawing in coming weeks. Sharp moves are likely, followed by subsequent corrections.”

The sudden swings really stem from the increased interest in bitcoin, especially with the news that the Chicago Board Options Exchange will allow investors to trade bitcoin futures within the next few days. The rally has piqued interest in cryptocurrencies and could well be paving the way for them to become mainstream alternatives to regular currencies. As they become more established, we will see more digital currencies being launched to meet that demand.  But as deVere’s Green rightly argues, bitcoin remains a major gamble as it is very much an unchartered waters asset.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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