As published in Hawke's Bay Today. Canny View by Nick Stewart, Authorised Financial Adviser.
Enter the word “Bitcoin” into Google, and you get three adverts for trading Bitcoin at the top of the list: “Trade Bitcoin online”, “Want to invest with Bitcoin”, “Top 3 Bitcoin Trading Brokers in New Zealand”.
The number of Google searches for bitcoin has spiked as the hype has built, with volume for the week ending December 2 expected to be close to double that for the preceding seven-day period.
The fast-paced growth of bitcoin’s value is highlighted by the price of a single bitcoin exceeding US$10,000 on some exchanges this week.
After starting the year at around US$900, the cryptocurrency broke the US$11,000 barrier a mere 12 hours after hitting US$10,000 earlier this week.
According to CNBC, “the price of a single bitcoin has gone up at a faster pace than any other speculative vehicle in market history, as investor enthusiasm for the new medium has reached a fever pitch”.
Last week I gave an overview of bitcoin and this week I am highlighting some of the potential risks and concerns that surround it. Over the years there have been numerous economic bubbles and subsequent crashes, for example, the dot-com bubble, the stock-market bubble, and the real estate bubble.
But the one few may be aware of is the tulip bulb market bubble (also known as tulip mania) of the 17th century in the Netherlands.
In the late 16th century, a phenomenon is known as “tulip breaking” was uncovered in the Netherlands. It was a strange occurrence in which the colour of the tulip petals changed into multi-coloured patterns as the result of a virus.
These mesmerising diseased tulips became more valuable than the uninfected ones, and the Dutch people even began using these infected tulip bulbs as a currency. There are numerous records of land and properties being sold in exchange for tulip bulbs.
One famous story was of an entire townhouse being offered to gain just 10 bulbs of the very special cultivar. They had petals that looked a bit like a candy cane and the fact that the offer was rejected outlines just how much these flowers were worth at the time.
At this point, it might be obvious what was to come next for the tulip bubble.
As the story is often told, almost overnight the bulb trade disappeared because as the price rose to dizzying heights, most buyers simply refused to accept and pay for the bulbs, everyone lost confidence and prices plummeted.
Tulip mania damaged the code of honor that underlay Dutch capitalism at the time.
A good friend of mine from Australia narrated this tulip mania story to me with a wise and funny quote, “I have a lovely tulip garden if you are looking for a diversification strategy”.
Some have likened this tulip mania to the current bitcoin craze. As any market trader will tell you, trading involves substantial risk of loss which is not suitable for everyone.
If you’re an investor, there are several points to consider when deciding to invest in bitcoin.
If you have the urge to invest in something new and unproven, you could do it with a minimal amount of money.
Despite what motivational posters suggest, regret is a two-way street, you can feel it by acting and not acting, or missing out.
Volatility is magnified with bitcoin due to people being unsure of what is going on.
Advocates of bitcoin can deliver impassioned speeches that sound very convincing about this being the future of currency.
Yet a few months back, Jamie Dimon, the CEO of JP Morgan Chase, knocked 3 percent from the price in just a few minutes by saying he thought bitcoin is a fraud.
Other aspects to consider is that hacking and scams are inevitable with bitcoin.
They happen at least once a week and are getting more sophisticated. The most typical bitcoin scams are mining scams, scam wallets and fraudulent exchanges which are managing to steal millions.
My final point which should be considered is regulatory risks. The higher the price of bitcoin and the more people who pile into it, the greater the risk of a government crackdown.
Bitcoin is something that undermines the power government has over money and taxation, something it won’t relinquish lightly.
People are buying bitcoin because they expect other people to buy it from them at a higher price; the definition of the greater fool theory.
When the crash comes, and it cannot be too far away, it will be dramatic.
• Nick Stewart is an authorised financial adviser and Executive Director of Stewart Financial Group. Stewart Group is a Hawke’s Bay-owned and operated independent financial planning firm based in Hastings. This represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to consider your investment objectives, financial situation, and individual needs. A disclosure statement can be obtained free of charge by calling 0800 878 961.