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Money Times - August 29, 2017

Posted by Jill Kerby on August 29 2017 @ 09:00

HAVE YOU MISSED THE BITCOIN EXPRESS?

 

Spotting financial bubbles are clearly harder than you may think.  Keeping well away from them, for many, is even harder. 

The latest bubble is the crypto currency Bitcoin, which in just the past year has gone from $575 in price to $4,262 at time of writing.

We only have to look at the property buying frenzy that began around 1997 here in Ireland to recall our own experience with bubbles. That one exploded – slowly, then practically overnight - when the property-as-investment bubble met its pin a decade later in 2008 with the realisation that we’d run out of buyers – and cheap finance – for the tens of thousands of surplus properties that were built here at such inflated prices.  Homeowners, worried about never getting on the property ladder, were unfortunately the biggest victims of all.

But Irish people have willingly participated in other, smaller speculative bubbles - nearly 600,000 people, encouraged by the government, bought privatised Eircom shares in July 1999 at the equivalent inflated price of €3.90 only to lose a third of their value.

Not long after that collapse was that of the NasDaq stock market in New York. Enthusiastic dot.com investors were far fewer than Eircom ones, but Irish pension funds were hard it and it triggered the downward interest rate adjustment by the US Federal Reserve and other global central banks, which in turn created the property bubbles in many Anglo-American economies.

Fools and their money have been parted many times by financial manias:  shop girls and shoeshine boys, along with lords and ladies, were caught up in the share mania of the late 1920s that turned into the Great Depression. Before that there was Tulipmania in the early 17th century; the South Sea and Mississippi bubbles a hundred years later.

And now there is Bitcoin.

Cryptocurrency proponents insist “this time is different’, but they should be reading the book of the same title by economists Carmel Reinhard and Kenneth Rogoff.

Today’s cryptocurrency mania is no different from all the others times when the inexplicable exuberance of the crowd, fed by soaring trading prices has led people to wildly speculate on a single asset; they are always certain they’ll know when to sell to the bigger fool and be out of the market before the price collapses.

‘Bitcoin’ was the first cryptocurrency and was launched in 2009 at the cost of only a few pennies. Its shadowy creators claim its production is limited to just 21 million units – thus ensuring a constant measure of value. To create a new blockchain of Bitcoins requires a lengthy and expensive computer “mining” process.

(Cybercurrencies are not held in physical form like cash currencies (or gold and silver coins, for example) or even in conventional bank deposit accounts. Instead, they exist exclusively as blocks in cyberspace, owned and then traded or sold directly by individuals (who hold then them in online purses) with no official third party intermediary, like a central bank or state revenue authority to regulate or or tax them. The blockchain miners are self-regulating.)

Today, there are over 830 cryptocurrencies like Bitcoins, most of them the equivalent of risky “penny stocks”. But some early traders have literally made overnight fortunes buying low and selling high. The market is now being flooded with ‘coins’ and they are being invested in and traded by some of the biggest investment banks in the world.

Cybercurrencies are supposed to be the ‘purest’ form of money with the value of each ‘coin’ set by willing buyers and the 260,000 retailers who participate in the cryptocurrency market. They may be easily portable (via crypto purses) and divisible (in coin ‘units’), two important factors for an viable currency but their “instrinsic” value and viability as a store of value (unlike an ounce of pure gold or silver) is still debateable.  And any asset that soars in value from €575 to $4,262 a unit in the space of 12 months is in a hyper-bubble that could prove very expensive to ‘the greater fool’.

I only know one Bitcoin owner personally who still has eight out of the 50 bitcoins his teenage son convinced him to buy a few years ago…at $2 a piece. He’s mostly spent the coins taking lovely holidays with travel operators and hotels that take these coins.

I’ve also had some recent discussions with some friends, readers and even Twitter followers who swear that crypto currencies, and especially the original Bitcoin will double in price as more and more corporations and individuals realise (as they do) that it is the only alternative to the corrupted currencies and physical bank ‘notes’ that we have no choice but to use.

They could be right. But not at this degree of volatility. At the top of this article I wrote that Bitcoin was $4,262 a ‘coin’ as I write. As I sign off…it’s price has fallen to $3,531.

 

Please send your queries to Jill c/o this paper or by email: jill@jillkerby.ie

 (The new TAB Guide to Money Pensions & Tax 2017 is now out. €9.99 in good bookshops. See www.tab.ie for ebook edition.)  

 

 

 

 

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