CHART OF THE DAY: The Insane Parabolic Rise Of Bitcoin

CHART OF THE DAY: The Insane Parabolic Rise Of Bitcoin

Matthew Boesler | Apr. 1, 2013, 4:55 PM | 3,475 | 5

The parabolic rise of Bitcoin has caught a lot of people off guard this year and is generating a ton of investor interest. Nick Colas at ConvergEx Group, the only Wall Street strategist we know of so far who has written about the Bitcoin market, says all of his clients think the virtual currency is in a bubble. When one looks at a chart, going all the way back to 2010, it’s easy to see why the word “bubble” is being tossed around among investors. Whether it continues to go up is anyone’s guess, but Colas thinks there are five broad themes converging to create a “perfect storm” behind the current rise of Bitcoin.

bitcoin-chart

Bitcoin Is The Perfect Asset Bubble — Prices Could Go Vastly Higher From Here

Henry Blodget | Apr. 1, 2013, 11:29 AM | 6,594 | 36

If you’re like most people, you have probably been hearing a lot about “Bitcoin” recently.

And, if you’re like most people, you probably do not know what it is or what the fuss is all about.

Here’s a snapshot.

Bitcoin is an electronic currency–a new form of money.

It’s also, possibly, the next great asset bubble. (Or investment, depending on how the story ends. Or both, depending on when you get in and get out.)

Bitcoins take the form of strings of numbers that can be electronically owned by and transferred among individuals and organizations. For now, the currency is primarily used for payments by fringe retailers or illegal transactions, but it is being accepted more and more widely. And organizations that exchange Bitcoins for standard currency are now being approved to operate as banks.

The premise and promise of Bitcoin–the part that appeals to folks who don’t happen to be gold bugs, conspiracy theorists, or cryptography geeks (obviously they all love it)–is that the current plan is for only a finite number of Bitcoins to be created. This is in direct contrast to standard government-issued currencies, which governments can always print more of. If the supply of Bitcoins remains finite, this should theoretically eliminate inflation, which is one of the biggest drawbacks of paper money.

(Although inflation has remained low in recent years, it ravages the value of paper money over time. A dollar in 1900 is only worth about $0.04 in today’s currency.)

So Bitcoin is conceptually very interesting, especially since it is not issued by a government agency. (Here’s a great presentation on what Bitcoin is and why some people are so excited about it.)

What has suddenly grabbed the public’s attention about Bitcoin, however, is the recent explosion in the value of the currency.

Because the number of Bitcoins is limited, their value increases rapidly when more people want them. And when the value of something increases rapidly, even more people want them. So the initial price increases fuel future price increases which fuel more future price increases…at least for a while.

Of course, this dynamic has fueled the inflation of every asset bubble in history. So it behooves people to analyze the sustainability of such price increases carefully.

When Bitcoin was launched in 2010, the currency initially had very little value. Quickly, however, the price of each “coin” soared above $25, making the initial Bitcoin believers rich. Then prices collapsed, with coins trading down to $5 again. And then Bitcoin prices began a slow and steady rise that has suddenly gone parabolic.

At the beginning of March, Bitcoins could be exchanged for about $35.

Now they’re changing hands at $90.

This explosive price increase has many intelligent people crying “bubble!”

And these intelligent people may well be right.

But if there’s one lesson that gets repeated again and again in bubbles, it’s that prices can rise much higher and bubbles can last much longer than most observers think.

(Internet stocks, for example, were first described as a “bubble” in 1995, a full five years before the peak. And the amount of money made in those next five years made everyone who was skeptical early on look and feel like a fool. House prices, meanwhile, were described as a “bubble” as early as 2002 and 2003. And it wasn’t until 2007, many years later, that house prices finally peaked.)

Driving prices in all bubbles, of course, is the possibility that the price action might not actually be a bubble. And that applies to Bitcoin, too.

If Bitcoins become an accepted currency everywhere in the world, if governments don’t intervene and make Bitcoin transactions illegal, and if the supply of Bitcoins remains finite (if the systems aren’t hacked or the anonymous creators don’t get greedy and decide to create many more). then Bitcoin prices could go much, much higher.

After all, how much would you pay for a currency that could be used everywhere in the world and would never demolish your savings by losing value to inflation?

You might pay a lot for that currency.

And, as with any asset, it would be hard if not impossible to determine how much value was “too much”–because determining the value of any asset or means of exchange is always a subjective exercise.

At the same time, though, there are many big risks that could bring the Bitcoin frenzy to a quick and brutal end.

Governments, for example, might decide that Bitcoin undermines the value of their own legal currencies–and ban it.

In the U.S., only Congress has the power to print money, and Congress might well decide that Bitcoin is money (which, it is).

Or, Bitcoin’s technology could be hacked, allowing Bitcoins to be stolen from their owners.

Or someone could make counterfeit Bitcoins.

Or the anonymous creators of Bitcoin could decide to create a lot more, thus debasing the value of each unit of the currency.

Or Bitcoin could never really gain mass-market acceptance.

In short, there are lots of reasons why Bitcoin might not be the wonderful “store of value” that Bitcoin fanatics and investors say it is–and, instead, might just become the next tulip bulb or dotcom stock bubble.

On the other hand…

Bitcoin might fulfill its promise.

And/or Bitcoin might make some speculators fantastic amounts of money in the hours, days, months, or years before its value crashes.

So you can understand why not just monetary theorists and technology folks and speculators are excited about it.

(Pssst… while I was writing this article, the value of a Bitcoin just soared above $100 for the first time. You missed a ~10% gain just this morning!)

ANALYST: All Of My Clients Think There’s A Bitcoin Bubble, But A ‘Perfect Storm’ Is Causing Prices To Surge

Matthew Boesler | Apr. 1, 2013, 3:43 PM | 5,863 | 5

It’s probably fair to say that the big rise in Bitcoin this year has caught many by surprise.

Today, the value of one Bitcoin hit $100. In early March, they were trading below $35. In January, they were trading below $15.

We’ve noticed a lot of interest from readers and investors in recent weeks as the virtual currency has gone parabolic.

However, as of yet, we only know of one Wall Street analyst who has taken up writing about Bitcoin: ConvergEx Group Chief Market Strategist Nick Colas.

Naturally, we were curious what Colas was hearing from his clients, who we figured must be asking some questions as well.

Here is what Colas told us (emphasis added):

The reaction from clients has been pretty uniform: it must be a bubble. Too far, too fast, too new … you get the idea.  Moreover, it’s very hard to short Bitcoins, so there’s no real way to express that pessimistic point of view, which is saving a lot of people some real money, since Bitcoin has some solid momentum just now.

Where is all of the momentum behind the Bitcoin trade coming from?

Colas bullets a few points:

  • An increasingly tech-savvy base of savers all around the world don’t think it is any stranger to trust an open-source piece of software than it is to put your money in a commercial bank
  • Lots of people around the world are uncomfortable with central bank policies, which seem to give money away to a global banking system which remains fundamentally broken
  • Worries over heavy deposit taxes in various European countries (Spain, Greece, and even Italy), courtesy of the resolution to the Cypriot banking crisis
  • Some clarification of U.S. regulations, bringing Bitcoin long-needed legitimacy
  • A naturally constrained and predictable supply through the issuance process

The term “perfect storm” fits here, even if it is a bit of a cliche at this point, says Colas.

Where it goes next is anyone’s guess, but Colas thinks the next big thing to watch out for will be whether mainstream businesses start accepting Bitcoin as payment in a more widespread fashion.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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