Are Bitcoins the new tulips?
Cryptocurrency returns are huge but the warning signs are there, writes Susan Edmunds.
Alison King of Rotorua started investing in Bitcoin in August.
She is in the UK at the moment, returning to New Zealand next month. So far, she’s put in about £400 (NZ$780) of her own money and has seen her account with UAE-based USI-Tech rise to be worth £1000.
‘‘I’m currently getting $25 a day in return but I reinvest. I’ll start to withdraw that when it hits $150, it sounds like a long time but by rebuying with my returns and the compound effect that will only be a couple of months,’’ she said.
‘‘So many places are accepting Bitcoin as payment these days it made sense to me. Just yesterday someone posted that they could quit their job at 32 as they were getting £700 a day back. I don’t expect that much but I know it will mean the difference in part-time and full-time work.’’
Recent rapid price rises and the popularity of such operations as USI-Tech has prompted a warning that Bitcoin could be the 21st century’s equivalent of the 17th century tulip bubble.
Bitcoin is a decentralised digital currency that operates independent of financial systems. It runs on underlying technology known as Blockchain, which keeps a ledger of all its transactions. At midday Thursday, one Bitcoin was worth about NZ$14,625. This week its value topped US$11,000
(NZ$16,000) – then fell to about
US$9200. Despite the drop, it was still more than 10 times what it was worth a year ago.
On one hand, devotees say fears of a bubble are overblown and based on outdated views of financial markets.
‘‘It is important to note that Bitcoin has been called a bubble since the price hit $30,’’ said Matt Gibson, of MyBitcoinSaver.com
He said there had been a large amount of institutional money put into the currency, fuelling the price rise seen over the past year. That could lead to a ‘‘small correction’’, he said.
‘‘However, my long-term view on Bitcoin is still very bullish. Bitcoin is currently considered by many as digital gold. The market cap of gold is about 6 trillion, the market cap of Bitcoin is about 160 billion, so there is still a lot of room to grow.’’
But others, such as Cristiano Bellavitis, lecturer in innovation and entrepreneurship at the Faculty of Management and International Business of Auckland Business School, say investors are far more likely to end up with a lot of coins worth close to nothing than they are to be sitting on millions.
He said problematic price bubbles arose when it was not possible to put a value on an asset.
‘‘Bitcoin doesn’t have any value per se,’’ Bellavitis said.
‘‘You can’t rent it, you can’t really buy anything with it. Its only use is an anonymous one, an illegal one, people use it if they don’t want to be traced.’’
Bitcoin suffered an image blow when it was linked to illegal trading site Silk Road.
Bellavitis said it was not clear how Bitcoin could be seen as a store of value, independent from currencies tied to governments or countries, as some people claimed.
‘‘Would you really put your savings in Bitcoin knowing it can go up and down 20 per cent in a day? If you want a safe store you’d invest in property in London, Hong Kong – you know that house won’t lose all its value. I would say there’s a 1 per cent chance it will go to $1m and a 90 per cent chance it’ll be much closer to zero.’’
Jeremy Sullivan, an investment adviser at Hamilton Hindin Greene, said while bitcoin’s future might be limited, Blockchain had solid potential.
It could mean faster, cheaper settlements in financial services, electronic voting, or even the transfer of ownership for things like cars, boats or artwork, he said.
‘‘This in my view is where the value is within the cryptocurrencies, the technology behind them. As at November 27, there are 1324 cryptocurrencies and growing. What makes Bitcoin special compared to the other 1323 you can choose from? The answer is nothing, except that it was first.
‘Bitcoin has so far proved to be a good gamble, but it is far from investing. There is no cashflow derived from the investment, unlike shares, fixed interest or property. It has no lasting unique value proposition, as it has been replicated 1300 times and counting, with little difficulty.’’
Alex Sims, Associate Professor in the Department of Commercial Law at the University of Auckland, agreed Blockchain and cryptocurrencies were likely to be lasting developments thanks to Bitcoin.
‘‘What it’s created is a new asset class and it’s got major utility. At the moment Venezuela and Zimbabwe are having to use Bitcoin because their system is under threat.’’
She said the current monetary system was relatively recent. ‘‘It used to be that silver was the standard, then gold, it’s a natural progression.’’
Bitcoin was limited in what it could do but other cryptocurrencies could have more potential.
‘‘It may be Bitcoin, it might be something else. Google was not the first search engine, Facebook was not the first social media. Bitcoin is just one – a lot of the others have advantages, you can do things with them but with Bitcoin you can’t really.’’
A number of central banks wanted to develop their own cryptocurrencies. ‘‘As an asset class it’s only just getting started.’’
Those who were worried about cryptocurrencies’ use for money laundering should look at physical cash first, she said.
Sullivan said those who were banking on further price rises were gambling.
‘‘Some may say, ‘Oh well it’s a bubble, but if I can get in before it’s too late I can still make a quick buck’. If this thought has crossed your mind, you know for sure that you’re gambling.
‘‘This is known as the ‘Greater Fool Theory’, where all you need is someone to be a little slower, or dumber, than you. Pity the person who is left holding the candle when the party is over. To use a well-known quote from the Great Depression: ‘You know it’s time to sell when the shoeshine boys give you stock tips’.
‘‘Unfortunately human nature doesn’t appear to change all that quickly, it has just moved to a different tulip.’’
‘‘So many places are accepting Bitcoin as payment these days it made sense to me. .’’
Bitcoin investor Alison King