Bitcoin: Is The Bubble About to Burst?

By Vinay Trambadia, Opinion Writer

Bitcoin (BTC) Futures are being introduced by the options and futures exchanges, Cboe Global Markets and CME Group on December 10th and 18th respectively, allowing investors more flexibility in buying the largest cryptocurrency in the world.  While this is another step forward, does this truly legitimize bitcoin?  Until that and many other questions can be answered, it reminds me of the Tulip Mania of 1637 and the shoe shine boy story from the Great Depression (look it up).  I do not think bitcoin will crash in the next few weeks or months, but people will eventually learn the hard way that bitcoin is not worth $19k. But I do think there are more questions than answers on BTC making it the riskiest investments of our generation.

When looking at any investment, an investor must look at the risk/reward.  In the case of bitcoin, it is difficult to really estimate the risks which worries me.  There is no regulation (yet) which is a huge gamble for investors. In the case of CME futures, investors normally post a certain value of the commodity being traded in their futures brokerage accounts.  In the case of natural gas, it is 8%, crude-oil is 4% and bitcoin investors will be required to post 35% when trading begins.  That margin itself shows the extreme volatility and low confidence in investors being able to pay for their bets.  For CBOE, the initial margin is 44%.

Thankfully, both CME and CBOE has some protections that will freeze trading (including profits or losses) if BTC swings above or below 20% within a single day.

Regardless of the protection on futures, BTC continues to trade because of the faith of the people that invest in it.  Why? Because of people like you and me.  Just like how the US dollar has the full faith and credit of the U.S. government, bitcoin has the full faith of us, the people. Once we decide to stop buying bitcoin because we prefer a safe investment like an ETF, or we just think it’s a bubble waiting to burst, then how much will it really be worth? Maybe it will be worth $15,000, or it will only be a fraction of it.

Regardless of all this risk, bitcoin continues to rise.  It will probably continue to rise, no matter how many times JP Morgan Chase CEO Jamie Dimon calls it fraud.  The underlying technology, blockchain, and faith of the people continues to grow day by day.  The more people invest in it, the higher it will go.  And, JP Morgan has since reconsidered, stating it could become be a new asset class for investors.

I should also note that because of bitcoin’s decentralized ledger system, it would automatically combat most fraud and hacking. Since you would not need to disclose your personal identity when buying BTC, even if someone were to find your key and take you entire bitcoin wallet, your information would still be deemed safe.  This security measure is good because it adds a level of trust in bitcoin being a medium of exchange.  The first thing ever bought with bitcoin was a $25 pizza in 2009 for 10,000 bitcoins by Satoshi and Hal Finney.  That exchange value has clearly changed over the last 8 years and number of transactions involving bitcoin grows steadily.

Furthermore, it is a new method of payment which would dramatically reduce transaction fees and help consumers.  But then again bitcoin’s extreme volatility would make it a questionable long-term store of value.  Would you really buy a few bitcoins if you knew there is a chance of it dropping it’s value by over 20% in just a day?  What will happen to your money if there is a massive BTC price correction in the upcoming months?

Which begs the question, what will happen to it in the future? Will it ever become regulated? And if it does, what will the value be then? What truly legitimizes bitcoin as a store of value and a medium of exchange?

If you really want to make a lot of money and become the next Warren Buffet, consider value investing.  Follow in his footsteps, find a truly under-valued asset and invest in that instead of Bitcoin.  Or, live life on the edge and ride out the volatility of bitcoin and see how much money you can make.  As a friend once texted me, “Tis a bubble, but bubbles are fun”.  They are, until they pop.

 

A version of this article appeared in the Tuesday, December 12th print edition.

Contact Vinay at

vinay.trambadia@student.shu.edu

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