Email of the day on bitcoin and manias
Comment of the Day

December 08 2017

Commentary by Eoin Treacy

Email of the day on bitcoin and manias

One more question about bitcoin, if you please (honestly, I am a bit tired of the subject - is it another sign of a bubble?).
Interestingly, but in the past bubbles had been initiated by professional traders, many of whom stayed in the market till the crash and suffered losses, while individuals piled in at later and final stages (think of tulipmania, 1929, dotcom, etc.). So, when you saw a lot of individuals and inexperienced investors in the asset in question, with their enthusiasm turning into euphoria, and professionals talking the asset up, you knew that the end was in sight. 

And with bitcoin we have quite the opposite. Just consider this abstract from recent Wall Street Journal article, "At the Asia Securities Industry & Financial Markets Association’s annual conference in Hong Kong on Wednesday, only two of about 150 professional investors raised their hands when asked if they had invested during a session on cryptocurrencies. “It’s incredible that we’re [seeing this] at a finance event, but it’s actually very common,” said the panelist Henri Arslanian, PwC’s China and Hong Kong leader for finch. Mr. Arslanian, who also teaches a fintech course at the University of Hong Kong, said when he asks his students that same question, usually about 30% of them say they own virtual currencies.
So, what can it possibly tell us about the nature of this market and its prospects?

PS. This WSJ story, published on November 29, had beautiful chart (please find attached). I just think that they are wrong to begin bitcoin bubble this year. I looked at bitcoin chart at FTM library and think that it is finishing its second bubble year, since in 2016 it rose more than 100%, from about $430 to $1,000, and began really buzzing last year, with the current one bringing euphoria.

Eoin Treacy's view

Thank you for this thought provoking question. I remember back in the early 2000s, when I was a salesman at Bloomberg, going to see private banks in Belgium and Luxembourg. There were a lot of young bankers a little older than myself. They had been hired in because the older generation needed young people who knew something about this “new economy”, that all the clients wanted to invest in. Simply by virtue of being young they knew more about the internet than their older peers. 

If cryptocurrencies were exchange traded, I believe the same thing would have happened on this occasion. However, because they are completely outside the realm of what is regulated as a financial instrument it is not possible for institutions to currently open trading desks. That is the primary reason behind the rush to open futures trading. It will give financial institutions the opportunity to offer products both long and short.   

Futures are either going to lead to an even greater acceleration or they are going to lead to a collapse as hedge funds use the introduction of leverage as an opportunity to short. There is the real prospect that it will be first one, then the other. 
Every major mania is characterized by a contradiction that is accepted as long as prices rise but it represents the catalyst for what will eventually cause the crash. Think about adages like “earning don’t matter” in the ‘90s, “house prices only ever go up” in the ‘00s, “the imperial palace in Tokyo really is worth more than the entire state of California” in the ‘80s. Don’t get me started on “negative yields are completely harmless”. 

Today the big contradiction with bitcoin is that it really can replace conventional currencies. Let’s try and be rationale. That’s ridiculous. It is too volatile, too slow, too energy intensive, easily stolen, impractical for transactions, often requires even more steps than existing networks, completely outside the ability of governments to influence the supply of and completely unregulated which, believe it or not, is not in consumers interests. No one cares about any of that right now but that is symptomatic of why bitcoin is a bubble. All these factors will prove to be its undoing eventually. 

An article from Bloomberg today states that less than 1000 people control 40% of the bitcoin supply and they talk to each other and often cooperate to push the market higher. What happens when the above factors begin to bite? Then those big holders become sellers, or some of them do, the integrity of the crowd breaks down, and that creates a cascade effect. 

It is not enough to make a lot of money on the way up. The real heroes in a mania are those who also have an exit strategy and execute it when the consistency of the trend changes. The $12,000 level and the integrity of the staircase step sequence uptrend are important touchstones for this market.  

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