The Bitcoin bonanza

The price of a single Bitcoin is now over US$8,000. It is quite a remarkable feat for an asset that exists only in the digital world, its value coming not from a physical use but its function as a digital distributed ledger (known as the blockchain).

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There are plenty of competing cryptocurrencies but Bitcoin was the first and so has the first-mover advantage, or what economists call path dependency. Think the QWERTY keyboard - it is not the most technically efficient, but the costs to change to a better design are sufficiently high to ensure that it remains in every household and office the world over. Unless a competing cryptocurrency emerges that is not just better than Bitcoin, but is significantly better, then Bitcoin is likely to remain as the coin of choice.

Our issue is less with Bitcoin or cryptocurrencies - they have a legitimate use case and are here to stay - and more with the speculative nature of their rise. The reality is that in fiat currency terms, you would have outperformed just about any other investment in 2017 by buying into any of the major cryptocurrencies at the start of the year.

And that's a problem.

The boom-bust cycle almost always ends with an asset class, or in this case multiple asset classes, experiencing seemingly never-ending price rises and publicity before the eventual collapse. Whether it be houses, equities, tulips or cryptocurrencies, the story is the same.

Bitcoin is an excellent vessel for fiat currency-based speculation because its supply is limited and it is accessible to anyone with even an entry-level smart phone. But while some of its rise is legitimate, much is the result of central banker idiocy and a global business cycle reaching maturity. Take the following:

  • The Swiss central bank just recorded third-quarter profits equal to about 5% of its gross domestic product, mostly due to its US$2.8 billion of Apple stock and US$1.3 billion in Facebook. It simply printed the Swiss francs and purchased part of a real company. What could go wrong?
  • Japan's central bank now owns about 71% of all shares in Japan-listed ETFs, or about 2.5% of Japan's stock market. It is spending US$54 billion a year acquiring assets in exchange for printing Japanese yen. What could go wrong?
  • The US Fed has assets amounting to about US$4.5 trillion, equivalent to about a quarter of America's annual gross domestic product. Its assets are mostly confined to two sectors, US$2.5 trillion in U.S. treasuries and US$1.8 trillion in mortgage backed securities it acquired during the last crisis. And how did it buy it all? You guessed it - by printing US dollars! What could go wrong?
  • At US$5.2 trillion, the European central banks owns more assets than any other, mostly government bonds. It printed Euros to purchase them. Again, what could go wrong?

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The Bitcoin bonanza is a symptom of the coming central-bank created bust, and a number of indicators are showing that we may be very close to that point.

Bitcoin is similar to all of the above asset classes except for the fact that it is relatively fresh to most people. Yes, it helps to solve a real world problem. But tulips, derivatives and sweetheart technology companies all solve real world problems, too. That does not make it immune to credit-fuelled, speculative fervour. To the contrary, given its limited supply and the ease of entry into the market, it makes it a prime candidate.

About the author

Dr Justin Pyvis is the Founder and Chief Economist at Pixelics. Justin is a published academic with a wealth of experience from working at AECOM, a global consultancy on the Fortune 500 and more recently with Asianomics Group, an economic, corporate and technical analysis research company based in Hong Kong.