Bittulip
All of the essential ingredients are there: a fascinating story, a rapidly rising price, highly technology-oriented, and little or no regulation. The recent Bitcoin bonanza is rippling around the globe in spectacular fashion. You can’t avoid seeing stories about Bitcoin if you watch television or look at your newsfeed on your IPhone. My daughter’s water polo buddies were talking about it when they stayed at our house this fall. I hear millennials talking about it in the gym every day. What do we make of this frenzied interest?
Some background: Bitcoin was created following the big tumble in global markets in 2008-09. A programmer created a “currency” that people could use as an alternative to currency issued by governments. This new currency is anonymous. The trick? One has to “mine” bitcoin via highly complex and heavily encrypted software. One interesting aspect of this phenomenon is that Bitcoin eliminates the need for a financial intermediary by using a public “distributed ledger”, called blockchain. It is the first decentralized digital currency, commonly called cryptocurrency (pretty cool name, don’t you think??). You can purchase bitcoin, or a millibitcoin (1/1000 of a bitcoin) or even several satoshis (1/1000000 of a bitcoin) on various coin exchanges that have developed to support bitcoin trading. Today (12/5/17 at 4pm) Bitcoin is valued at $11,810. It started the year with a value of $997.
Some adventurous merchants accept bitcoin, and the number keeps growing. Price Waterhouse Coopers, the global accounting firm, last week admitted that it accepted Bitcoin as payment for services rendered. Fun fact: in 2010, a hungry fellow paid 10,000 bitcoins for two pizzas from Papa John’s. Even with inflation factored in, that was an expensive pizza purchase!!
I am tempted to call Bitcoin a bubble. Yet calling Bitcoin a bubble is not new. Many notable financial types have opined about its overvalued status. Former Fed chair Alan Greenspan (of “Irrational Exuberance” fame), Nobel Laureate Robert Schiller, and JP Morgan CEO Jamie Dimon have all chimed in on the subject. Dimon said it “was only useful for drug dealers and countries like North Korea”. Drug dealers and despots….what a concept! And finally, noted investor Warren Buffett said “stay away from it. It’s a mirage, basically”. That was in 2014.
Perhaps one of the more salient comments comes from Nout Wellink, the former president of the Dutch Central Bank: “this is worse than tulip mania. At least then in the end you got a tulip. Now you get nothing”. Remember history: in 1637 the most prized tulips traded for 10 times the average wages of craftsmen! It didn’t end pretty, either.
I will venture a guess that Bitcoin indeed will be recorded as another bubble, perhaps as notable as the Dutch Tulip Mania of 1637 or the South Sea Bubble of 1711. Or maybe it will be classified as a spectacular “teachable moment” for all the millennials. As for me, I’ll be sitting this one out.
Ralph McDevitt December 5, 2017
The prominent underlying risk of using bitcoin as a medium of exchange is that it is not authorized or regulated by any central bank. Bitcoin issuers are not registered with the SEC, and the bitcoin marketplace is currently unregulated. Bitcoin and other cryptocurrencies are a very speculative investment and involves a high degree of risk. Investors must have the financial ability, sophistication/experience and willingness to bear the risks of an investment, and a potential total loss of their investment. Securities that have been classified as Bitcoin-related cannot be purchased or deposited in Raymond James client accounts.
