12/11/2017 0 Comments A Bit of BitcoinBitcoin has been the hot topic on every financial journalism site for the past two weeks. A former lonesome outsider to the markets has now taken center stage in its investor frenzy with its volatile returns.. Being naturally a bit skeptical, I side with the opposition: Bitcoin is already showing signs of becoming a financial bubble.
First, no matter how long it has been since bitcoin emerged, the currency still has a bad reputation because of the lack of security. Instead of being secured by a central bank like other currencies, it is controlled by an automated “mining” system that creates currency at a fixed rate. If anything dramatic happens to the currency that requires central bank action (such as devaluation), they do not have a way to adjust the currency quickly. Additionally, the currency still has a reputation for being involved in illegal activity, especially the global drug trade. The biggest risk factor, however, is Bitcoin’s current behavior, which is beginning to resemble a financial bubble. Bubbles tend to develop after a new kind of technology has been introduced or popularized (see the Dutch Tulip Mania and the Dotcom Bubble), and because bitcoin fits this description, there is already a risk of crash. Additionally, people who know very little about bitcoin are getting involved and popularizing the currency with “get-rich-quick” stories. Because of this popularization, the currency has been incredibly volatile, moving up 40% in 40 hours and then immediately dropping down $2500. Even some people that are part of bitcoin industry don’t entirely understand the reason behind this sudden craze. If this trend continues, we could find ourselves in a bubble too large for any market to control on its own. Overall, this week has been spent looking into the next potential market craze as well as continuing my work valuing Installed Building Products (IBP). Even though looking into situations like these where I am not actually making investment decisions seems useless, I believe that economics is history, and history repeats itself. Therefore, if I am able to identify trends like these early, I will be able to have an advantage against the others affected by the craze. Hopefully this bitcoin mania will dissolve before turning into full boom-bust cycle, and I will have a bit more time to prepare my list of to-buy companies before the next financial crisis.
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