Are Cryptocurrencies the Tulips of the 21st Century

Investor sentiment in gold and silver market has turned quiet of late. Record setting levels in equity markets are one culprit for sure. Another is the exciting drama about GameStop investors who are “sticking it to the suits”. However, the most recent buzz is all about cryptocurrencies and Bitcoin’s revival and skyrocket to over US$52,000, an increase of more than 300% since August of 2020. Elon Musk’s recent endorsement of the cryptocurrency coincided with a $1,000 one day rise and drastic increase in Google trend searches.  

New technology and massive interest in speculative assets are a phenomenon that has jeopardized investors throughout history. One of the best-known classic examples that appears in many economic and financial textbooks is the Dutch tulip bulb market bubble known as ‘Tulipmania’. The obsession to own tulips began in earnest in 1634, and by 1636 demand had increased so much that contracts were established on the stock exchange of Amsterdam, this enabled investors to use margined derivative contacts – this is when the price skyrocketed. Then in February 1637 prices began to plummet and many investors were left holding tulip bulbs that they could not sell to repay the loans.      

Are Cryptocurrencies Halfway to Tulipmania?

Tulipmania – Tulip Price Index 1636-37

A second classic example of overexuberance in markets is the British Railway mania between 1843 and 1845. The rapid expansion of the railway system across Britain and Ireland brought even more speculation and companies to the industry with more than 9500 miles of railway being proposed by 1844. By 1845 many of the newly formed companies began running into financial difficulty. Over-investment coupled with the Bank of England raising interest rates moved investors away from railways back toward bonds and ended the railway mania. Rail companies went bust and investors were left without any means to recoup their investment. The boom followed by bust did provide for larger railways to strategically purchase smaller companies at a fraction of their replacement costs of expansion. 

Watch Now: Should I Buy Gold or Bitcoin?

Two recent examples of recent market bubbles are the Japanese stock and real estate bubble and the Dot-Com bubble. The rapid increase in Japanese stocks and real estate in the mid to late 1980s was driven by increased interest and speculation in rapidly rising Japanese growth companies. Then foreign investment drove the value of the yen up 50%, which in turn hurt the export profits of the companies.    

The Dot Com bubble was driven by speculation in the viability of US technology companies – from 1995 to 2000 the NASDAQ index increased five-fold.    

The definition of a speculative bubble is…

a spike in asset values within a particular industry, commodity, or asset class to unsubstantiated levels, fueled by irrational speculative activity that is not supported by the fundamentals

investopedia.com

There is no doubt that there were millionaires made as the asset price rose in each of the previously mentioned speculative bubbles, but there were also paupers made as prices came tumbling down. The current exuberance and speculation in bitcoin, and subsequent exponential rise has all the characteristics of a classic speculative asset building to a point of deflating.

Cryptocurrencies – The Dramatic Rise of Bitcoin

The permanent stability of bitcoin has yet to be determined. One of the characteristics that is touted as a benefit of cryptocurrencies is that they are decentralized and there is not a central authority that manages the value of the cryptocurrency.  

The risk to this is regulation that limits or prevents cryptocurrencies being used for transactions within an economy.  A proposal to ban all cryptocurrencies in India is already in progress, it is likely that other governments will soon follow.

The taxation of Bitcoin and similar currencies is still uncertain, due to the nature of its anonymous ownership. However, if governments do allow for purchases within their respective economies how these transactions are taxed has yet to be seen. Furthermore, Bitcoin as a medium of exchange is limited as Bitcoin can currently only process ~ 4 transactions per second, compared to Visa’s processing capacity of 1,750 per second.

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The relative short history of Bitcoin, the first of the cryptocurrencies which was launched in 2008, and the high volatility creates uncertainty about the store of value. Over the last 10 years Bitcoin’s monthly price volatility has ranged from 5% to 30% (monthly rolling average). At 10% assumed volatility for Bitcoin: $52,000/coin the standard deviation is ~ 5,200 … not many investors can handle these types of swings in their portfolio. The wide price fluctuations also make it challenging to price goods and services in Bitcoin. Therefore, making it not a reliable unit of account.

Although, bitcoin is the first and arguably the most well-known of the cryptocurrencies, Ethereum, XRP, Tether, Litecoin to name a few, but there are many others that are gaining popularity, this adds competition risk to investing in one type of cryptocurrency. Also there are unknown security risks such as loss or destruction of the private key and cyber-security risks including malicious activity.

There are many other questions yet unanswered about the permanent stability of bitcoin. Will the ESG investing community, which holds immense clout over capital flows [see: coal] decide that bitcoin is too environmentally unfriendly? If ‘holding’ bitcoin fuels the rally, how can holders ever sell without ending the rally? The Ontario Securities Commission has approved a bitcoin ETF – will financialization accelerate a rally or end a rally? TESLA owns digital currency on its balance sheet – is selling cars for bitcoin their latest business model?

#ShortSqueezeSilver on GoldCore TV

NEWS and COMMENTARY

Gold Gains From Near Two-Month Low as Dollar Strength Eases 

Could Silver “Do a Palladium”? (SilverSeek) 

We were ‘dangerously close’ to collapse of ‘entire system’ — GameStop hearing 

GOLD PRICES (USD, GBP & EUR – AM/ PM LBMA Fix)

17-02-2021 1788.85 1780.70 1289.76 1285.84 1482.78 1479.05
16-02-2021 1823.45 1794.25 1309.78 1292.94 1499.61 1482.23
15-02-2021 1817.45 1817.30 1306.56 1307.18 1497.94 1498.73
12-02-2021 1818.00 1816.35 1318.05 1313.95 1501.49 1501.76
11-02-2021 1841.70 1840.10 1331.92 1331.68 1518.67 1516.06
10-02-2021 1843.45 1842.65 1331.89 1330.76 1520.11 1519.63
09-02-2021 1846.55 1839.60 1341.15 1334.45 1525.25 1520.80
08-02-2021 1811.65 1835.25 1323.59 1336.43 1506.75 1522.16
05-02-2021 1808.55 1802.95 1320.60 1313.81 1510.14 1499.87

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Stephen Flood

Stephen Flood is the CEO of GoldCore. He is a former Wall Street equity trader and FinTech expert. He has been involved in the precious metals markets since 2004 and has appeared as an expert contributor on CNBC, CNN, BBC, RTE & Bloomberg TV and has had articles published in the Irish Times, Irish Independent and The Sunday Business Post.

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