NewsClick

NewsClick
  • हिन्दी
  • Politics
  • Economy
  • Science
  • Culture
  • India
  • International
  • Sports
  • Our Articles
  • Our Videos
search
menu
  • All Articles
  • Newsclick Articles
  • All Videos
  • Newsclick Videos
  • हिन्दी
  • Politics
  • Economy
  • Science
  • Culture
  • India
  • International
  • Africa
  • Latin America
  • Palestine
  • Nepal
  • Pakistan
  • Sri Lanka
  • US
  • West Asia
About us
Contact us
Follow us Facebook - Newsclick Twitter - Newsclick RSS - Newsclick
close menu
Politics
International
US
Bitcoin: Tread with Caution
People who have never invested in a stock, bond or real estate suddenly want to own Bitcoin. The most popular topic at many social gatherings is, "Which crypto is the next bitcoin?"
Vatsal Srivastava
12 Dec 2017
Bitcoin

George Soros, the legendary hedge manager, once said that in the financial markets, it doesn’t matter whether one is right or wrong: What matters is how much money one makes when right and how much one loses when wrong.

Investors who managed to catch Bitcoin early, look like geniuses and those calling for a crash within a short time frame will also look like market gurus if they profit from its downfall.

The attention of retail investors usually comes at extreme price points -- either when Bitcoin is making new highs or there is a very deep correction.

At this juncture, first-time investors in the cryptocurrency space should not jump right in. There are many indicators that a big correction can occur over the next few weeks.

Up until now, Bitcoin has been one-directional bet. Market participants have not been able to express their bearish view on the cryptocurrency by taking short positions. Thus, every correction on its parabolic rise up was only a function of investors booking profits. However, from December 11, Bitcoin futures have been launched on major exchanges in the US, including the Chicago Mercantile Exchange, which would give financial institutions an opportunity to be net short Bitcoin futures. This would imply a much fairer and a more efficient pricing mechanism. Remember, the Tulip bubble burst after the Dutch Government introduces Tulip futures.

Why does Bitcoin seem like a unique bubble?

When we speak of bubbles -- be it the Tulip bubble, the South Sea bubble, the Mississippi bubble, the Silver bubble of the 1980s, the Nikkei bubble of the late 1980s, the Dotcom bubble of the 1990s, the Housing bubble of the mid-2000s as well the most recent gold rush of 2011-2013 -- they all display similar characteristics when it comes to the excessive ownership of the underlying asset as well the exponential price movement. Further, during the bubble, although certain valuation metrics may be in place to measure the intrinsic value of the asset, it is usually the subjective value investors put on the asset which dictates the market price.

For example, if North Korea were to actually launch a nuclear warhead tomorrow, there would be no reason for a non-yielding asset like gold to be trading at $1,600 per ounce. Similarly, if real interest rates globally were to rise in an unexpected manner in a very short time, there is nothing to stop gold trading below its cost of production. One cannot reason these prices at such times. But such price levels are almost always never sustainable and revert to logical price bands.

Bitcoin has no pricing model. Conventionally speaking, it's a non-productive asset.

Bitcoin miners are annually using the electricity consumption equivalent to that of Nigeria. Their costs are likely to increase and by some estimates, the cost (electricity) of mining per year would be the annual electricity consumption of Japan over the next few years. This is why most miners are based out of Iceland where cooling costs for their servers are low while others are based in China where electricity is being subsidised. Clearly, from the energy consumption perspective, the cost of mining a bitcoin at present seems unsustainable.

In terms of participation or ownership of the asset, the Bitcoin phenomenon seems to have more frenzy than most recent financial bubbles. People who have never invested in a stock, bond or real estate suddenly want to own Bitcoin. The most popular topic at many social gatherings is: "Which crypto is the next bitcoin?"

One of the biggest risks with the Bitcoin and cryptocurrencies is the legal and regulatory risk. The beauty of bubbles is that during the bubble, many policymakers and observers do see clear signs of frenzy and irrational exuberance. But it is usually the market itself which bursts the bubble and not the government. This is simply because when you burst a bubble prematurely, there is a high possibility of bursting a lot of "non-bubbles" which may hurt the real economy. However, with cryptocurrencies, this is not the case. If the US Federal Reserve were to simply say that ownership of a Bitcoin is illegal and declare it worthless (or even fix a price for it as it is essentially priced in US dollars), the price would come tumbling down.

Bitcoin and other cryptocurrencies have never been through a financial crisis. One cannot be certain that the crypto asset class is completely non-correlated from the financial system. Thus, comparisons between gold and bitcoin are unjustifiable and it should not be commanding any "safe haven" premium currently.

What seems certain is that the technology underlying Bitcoin -- Blockchain -- is here to stay and will be more dominant in the future across industries from healthcare to retail. Further, investors should also study the likes of Ethereum and Ripple.

(The author has owned Bitcoin in the past but has no position in it currently. Vatsal Srivastava is Consulting Editor [Currency and Commodities] with IANS.)

Disclaimer: The views expressed here are the author's personal views, and do not necessarily represent the views of Newsclick.

Bitcoin
cryptocurrency
United States
US Dollar

Trending

Sangh Parivar’s Deadly Calculus of Elections in Bihar
The Peopling of South Asia and the New Genomic Evidence
Exclusive: Manik Sarkar on Tripura Results, the Resistance and the Way Forward
Prof. Aijaz Ahmad on Syria, US and Palestine
Nitish Kumar is Political Prisoner of BJP-RSS: Urmilesh
Bihar Riots: Hindu Man Saved Lives of 40 Kids in Samastipur
Busted: Republic Reporter Wrong in Blaming Rohingyas for Assaulting Him
Technological Change and Impoverishment
How and Why of Farmers’ Long March to Mumbai
Defense: Inadequate Funds or Misplaced Priorities

Related Stories

Pavan Kulkarni, The Dawn News
Durham Becomes First US City to Prohibit Ties With Israeli Defense Forces
19 April 2018
As the Israel’s atrocities against Palestinians continue, the Boycott, Divestment and Sanction (BDS) movement opposing the occupation of Palestine
Bruno Rodríguez Parrilla
The Dawn News, Newsclick Team
"The US is the Author of all Despotic Regimes in Latin America and their Crimes"
19 April 2018
At the 8th Summit of Americas (April 14, Lima, Peru), the Minister of External Affairs of Cuba, Bruno Rodríguez Parrilla, in the words of Simón Bol
trump
The Dawn News
My Way or No Way: Trump on Korean Peace Talks
19 April 2018
The United States President Donald Trump has threatened that he will walk out of the much anticipated Korean peace talks, i

Pagination

  • Next page ››

More

  • 19/04/2018
    Maharashtra Witnesses Rise in Farmer Suicides, 696 cases in 3 months
    The government has chosen not to intervene in the market prices of the seasonal crops, forcing farmers to deal with the debt and the crisis on their own.
  • 19/04/2018
    MP Government Proposes a Draconian Law, Boundless Power to the Police
    The bill proposes to implement the commissioner system and intends to act as a panacea for all crimes.
  • 18/04/2018
    Peasant movements across the world mobilized on International Day of Peasant Struggle
    They highlighted their opposition to Free Trade Agreements and their rejection of criminalization of social movements.
  • 18/04/2018
    Right to Food Campaign Opposes Distribution of Maneka Gandhi's ‘Nutrient Packets’
    Replacing diverse foods with factory-made, processed nutrient packets is not just unhealthy and unsustainable, but will open doors for private contractors and suppliers, leading to massive corruption…
  • 18/04/2018
    Pune Police Raid Dalit Activists' and Lawyers' Houses in Bhima Koregaon case
    The activists allege that the government is Afraid of the Dalits and are hence targetting them.
  • Load More
Subscribe
*
connect with us
about us
contact us