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Bitcoin Bubble?


It is probably not a good sign for an investment when its largest clearing firm takes out an advertisement in the Wall Street Journal asking for more regulatory oversight and warning investors that its investment category is so volatile that futures contracts could create devastating losses. Yet this is exactly what happened when Interactive Brokers, the clearing firm for the bitcoin cryptocurrency, responded to the Chicago Mercantile Exchange’s plans to start listing bitcoin futures, which it will do this week. The Chicago Board Options Exchange began listing bitcoin futures last week.

The dustup is significant for a variety of reasons. First, you can hardly turn on your computer today without reading about the remarkable runup in bitcoin prices, and seeing a plethora of advertisements telling you how you, too, can get in on the action. This, of course, is exactly what one sees at a precipitous market top, and indeed bitcoins are now trading around $18,000—up close to 1,700% year to date, compared with a mere 19.5% for a pedestrian investment known as the S&P 500 index.

Second, there are serious questions—despite the “come-ons” and advertisements—about whether bitcoins should be considered investments in the first place. Futures contracts is the cryptocurrency’s first foray 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 distributed computer database, whose primary purchase vectors so far have been illegal drugs and illicit weaponry.

Bitcoin owners, meanwhile, are doubtless experiencing some of the same feelings that a 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 (the old monetary unit of the Netherlands) two years before—could now, in the teeth of a mania, be sold for a nice house or ten times the annual income of a skilled craftworker. The wise move then would have been to cash out before the collapse. The same may be true today.

However, the blockchain technology which underlies bitcoin could still be the way of the future.  One digital currency expert put it this way, "In the Bronze Age, we had metal. With the dawn of literacy, we used notes. Today we are living in the technology age, and this is the first real solution built in this environment to suit the needs of this current, technology-connected world."

If you are unfamiliar with cryptocurrency and the blockchain technology that it is built on, this video gives a good introduction: https://anders.com/blockchain/

Sources:
https://www.ft.com/content/b4c1a564-c9fe-11e7-ab18-7a9fb7d6163e
https://www.marketwatch.com/story/wall-street-pioneer-takes-out-ad-in-wsj-to-warn-of-bitcoin-trading-perils-2017-11-15?mod=mw_share_twitter
https://www.forbes.com/sites/cbovaird/2017/11/16/bitcoin-reaches-latest-high-inches-closer-to-8000/#1fc43ef74caa
https://www.economist.com/blogs/buttonwood/2017/11/greater-fool-theory-0?fsrc=scn/tw/te/bl/ed/?fsrc=scn/tw/te/bl/ed/thebitcoinbubblegreaterfooltheory
http://www.chicagotribune.com/business/ct-biz-bitcoin-invest-bubble-20171130-story.html