Bitcoin: Deja Vu?
A dramatic, unexplained 1,000 percent boom. Then a 50 percent collapse in weeks.
Not Bitcoin in early 2018, but at the end of 2013 and start of 2014. We have been here before. Some things have changed since -- not least the ability to profit from the declines -- but the same lessons still need to be learned: the crypto-currency remains a very risky bet.
Trying to explain such price moves in fundamental terms is a fool's errand. As in 2013, this is a market of speculators looking to get fabulously wealthy, not of investors analyzing business models or cash flows. Fear of missing out drives the boom and a rush to cash out the bust. And, remember, the real-world adoption of Bitcoin is still a dream.
Aren't there far more rivals to Bitcoin this time? Yes, but there were plenty being shopped around in 2013, from Namecoin to Feathercoin. Today it's Ripple or Ethereum. Of course, there are big differences in the reasons why you might use each token. But Ripple's own 60 percent tumble in a matter of days is evidence of the common thread: right now, it's about hot trade tips, not the next great long-term project.
What about the maturity of the cryptocurrency market as institutional investors get involved? There are certainly plenty of new and vocal hedge funds out there -- but Fortress for one was trading Bitcoin in 2013, too. The advent of futures contracts has allowed more investors to take the bearish side of the Bitcoin bet. But as the futures contracts expire, funds who had sought to profit from the price difference between the currency and its derivative may now be rushing to sell the underlying coinage. 1
Which leaves the individual investors who have dominated this market for so long. Some have lost money; some are in debt; others are still sitting on life-changing wealth. It was the same in 2014. Regulators are flexing their muscles more, but we have also seen them change their minds: Japan is embracing crypto-currencies years after it had to clean up Mt. Gox's collapse. Attitudes can change, and we have yet to see a systemic crisis created by Bitcoin.
If history is a guide, Bitcoin is set to fall further for longer, perhaps as much as 80 percent. But the urge to gamble in the great cyber casino with untraceable digital cash is hard to kill. Expect the establishment's cries of I-told-you-so to keep falling on deaf ears.
My Gadfly colleague Stephen Gandel has more on this carry trade here.
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