BITCOIN HYSTERIA GOES MAINSTREAM
Cryptocurrency has everybody buzzing, but there’s a caveat, says Jonathan Ratner
Whether it’s the shoeshine boy of decades past, or the taxi driver of more recent times, an old investing adage suggests that when somebody you wouldn’t expect is talking stocks or giving you portfolio advice, it’s time to sell.
These days, its hard to find someone who isn’t talking about bitcoin.
From high school students discussing how to purchase fractions of the digital currency over lunch at McDonald’s to YouTube celebrities giving advice on how to make a quick buck, or thousand, the mania around the cryptocurrency has been mounting for weeks.
On Sunday night, it grew even stronger, as Cboe Global Markets Inc. launched the trading of bitcoin futures contracts, leading to another price surge and the imposition of trading halts to quell the frenzied activity.
On Monday, the rise continued, as prices for the contract expiring on Jan. 17 — the vast majority of CBOE bitcoin futures traded so far have been of the onemonth variety — leapt more than US$3,100 to US$18,600 by late afternoon.
The price of bitcoin itself, as reported by Coindesk.com, also surged Monday, climbing nearly 13 per cent to surpass US$17,000 for the first time.
“We’re obviously dealing with a global phenomenon that everyone can potentially partake in — both the creation of bitcoin, but also investing in it,” said Douglas Porter, chief economist at BMO Capital Markets. “There is a place for it, and certainly the blockchain technology does have a very important future.
“Having said that, every great mania or bubble starts off with a very compelling story.”
The most popular of many unregulated digital currencies with blockchain as the underpinning technology, bitcoin began 2017 just below US$1,000, and is up more than 275 per cent in the past three months alone.
“It has — to some extent — gotten a stamp of legitimacy from the fact that the CBOE has welcomed it, and the fact that so many central bank officials globally are now looking at it,” Porter said, noting speculation that the U.S. Federal Reserve may eventually issue its own cryptocurrency, and ensure Americans use it.
“We’re definitely hearing modern-day versions of the shoeshine boy story, which is usually a pretty good signal that we’re getting close to the top. Although, history has shown that manias can go on a lot longer than many people believe is possible,” he added.
CBOE is using pricing data from Gemini, the cryptocurrency exchange founded by Cameron and Tyler Winklevoss. The twin brothers sued Facebook co-founder and chief executive Mark Zuckerberg over the idea behind the popular social network, and used part of the US$65 million settlement to invest at US$120 per bitcoin in 2013.
The Winklevoss twins’ bitcoin holdings are now estimated to be worth approximately US$1 billion, and that’s just the sort of story that has the mainstream public so interested in this complex digital entity that was launched with the intention to circumvent government currency controls, and make online transactions easier by eliminating the need for third parties.
The heavy interest forced the temporary shutdown of Cboe’s website, but the bitcoin wave still may only be in its early stages, as CME Group is set to launch its own trading later this month, and Nasdaq will likely follow in 2018.
Yet there are still strategists, currency traders and other experts on both Bay Street and Wall Street that have no opinion on bitcoin — at least officially. But that’s changing quickly.
Matt Barasch, Canadian equity strategist at RBC Capital Markets, noted that institutional investors are now willing to entertain the idea that what’s happening with bitcoin relates to the gold market.
“The argument has been that gold is a substitute for fiat currencies, and perhaps bitcoin is simply starting to fill in part of that niche,” Barasch said.
In the era of Donald Trump, North Korea, and various other events and issues that have been thrown at investors in the past 12 months, many investors are wondering why gold hasn’t done better. That prompted Barasch to do some number crunching, based on the assumption that all the money that went into bitcoin during the past 12 months, went to gold instead. Gold is currently trading near US$1,250 per ounce, but would be at about US$1,325 in this scenario.
“From my lens, you can’t simply dismiss the question, and say this has nothing to do with gold,” Barasch said. “This is really the first year bitcoin has really mattered because the size of it has caused it to matter.
For now, however, investors will have a tough time putting bitcoin anywhere other than the highly speculative portion of their portfolios. It’s possible that cryptocurrencies don’t even exist in a couple of years, and the market simply doesn’t have enough information to work with yet.
While bitcoin’s equity value shouldn’t be measured like a business because it doesn’t have profits or even operations, that hasn’t stopped people from doing so, and the figure is staggering.
“At the rate it’s going, it’s going to have a larger market cap than the Canadian stock market pretty soon,” Barasch said.
According to Coinmarketcap. com, bitcoin’s market cap is about US$280 billion … for those keeping track.