Bitcoin: Opportunity or Bubble?
We have recently had several of our friends and clients ask us about the craze that is bitcoin, and whether or not we feel it is a good investment opportunity. If you have met with us before and understand our investment philosophy, you likely already know our answer. That said, anytime an investment performs the way bitcoin and other crypto currencies have performed over the recent past (if that has ever happened?), it can be somewhat intriguing. The question is an investment in bitcoin an investment in a bubble or a real opportunity?
It is probably not a good sign for an investment when the largest electronic brokerage firm in the US takes out a full page ad in the Wall Street Journal asking for more regulatory oversight and warning investors that its investment category is so volatile and immature that futures contracts could create devastating losses in traditional capital markets. Yet this is exactly what happened in mid-November when Interactive Brokers, the clearing firm for the bitcoin cryptocurrency, responded to the Chicago Mercantile Exchange’s plans to start listing bitcoin futures.
This is significant for a variety of reasons. First, it seems that everywhere you turn there is a discussion of the remarkable run-up in bitcoin prices as well as a plethora of advertisements telling how you too can get a piece of the pie. This, of course, is exactly what one typically sees at or close to a market top, and indeed bitcoins are trading, as of 12/5/17, at around $11,700—up more than 1000% year to date, compared with a mere 17.7% for a pedestrian investment known as the S&P 500 index.
Second, there are serious questions—despite the word on the street—about whether bitcoins should be considered investments in the first place. This proposed futures contract is the cryptocurrency’s first peek into the mainstream investment world, and some bitcoin owners are now wondering what exactly one does with a “currency” that is nothing more than blips in a computer database, whose primary uses to date have been to purchase illegal drugs and illicit weaponry.
Bitcoin owners, meanwhile, are likely experiencing some of the same feelings that the Dutch farmer would have gone through in the early 1600s, when the tulip bulb he held in his hand—worth far less than a guilder a few years earlier—could now, in the throws of mania, be sold for a nice home or ten times the annual income of a skilled craftsman. The wise move then would have been to cash out before the collapse. The same may be true today. Only time will tell.
Some of the material above was prepared by Bob Veres Inside Information