Wednesday, December 27, 2017

Bubbly for Christmas

The Bitcoin phenomenon has reached an interestingly delicate phase. The price inflation over 2017 looks like a bubble, but it isn’t. At least not quite. 

Bubbles like the one that helped re-set expectations of the ‘new media’ age have a number of key characteristics this one probably still lacks. 

Firstly, there is a moment when everyone realises that valuations have parted company with any kind of underlying ‘real’ economic value. Then there is the period that loads of small investors pile in. And finally there is the matter of debt. 

The man who purchased our company in 1998 used in part the shares in his own NASDAQ-quoted enterprise to do so. At the time he was secure in the conviction that these would only ever go up in value, which is possibly why he made the error of electing to pay us out after a certain period with an unfixed quantity of shares up to a an agreed fixed monetary value. Time would unfailingly work in his favour he imagined. 

His optimism was further reflected in the fact that he had been borrowing funds in order to aggressively expose himself to the wider dot com dream. 

Shortly after the deal was done the Ruble defaulted causing the first major market correction of the digital era. With share prices plummeting, our over-enthusiastic acquirer faced margin calls and had to sell his own stock in the company that he had founded simply in order to cover them. 

When the broader investing public took note that the CEO was dumping stock, panic set in quickly and the price tanked. This is how bubbles tend to play out. 

With regards to the Bitcoin situation right now there is still a comparative dearth of smaller-scale, steroid-pumped, American-style speculators in the mix, as most of the cryptocurrency is currently held either by the existing super rich or those who have become so by mining it. As for the potential for disconnect with ‘real’ values, quien sabe?! 

And over-extended debt is yet to become a big issue, though some of the exchanges are now starting to allow leverage. One article I read recently suggested that the 15x leverage on offer at the Tokyo exchange could result in ‘contagion’ - and the full zombie apocalypse is perhaps presaged by the 100x leverage offer that pops up as a sponsored link on Google. 

So the situation right now is highly volatile, but not entirely bubbly. Professor Niall Ferguson suggested recently that potential punters should.. “Think about it this way. The maximum number of bitcoins that can be created is 21m. The number of millionaires in the world, according to Credit Suisse, is 36m. Their total wealth is $128.7 trillion. If millionaires collectively decided to hold just 1% of their wealth as bitcoin, the price would be not $15,000 but north of $60,000. If they raised that to 5%, the right price for bitcoin would be above $300,000."

Maybe, but think about it this way as well. There have to be plenty of state players out there right now considering how handy it would be to propagate the impression that the cryptocurrency has somehow seriously over-reached itself. 

By helping to engineer a significant price correction right now governments in the developed world could achieve a number of significant ends. 

1) Deliver a blow to those members of the global uber-elite who have demonstrated a fairly loose commitment to the ideal of the nation state 
2) Further erode the online influence of techno-libertarians 
3) Shut down the clandestine payments and laundry system that has appeared to be emerging for organised crime, terror groups and other dark-net beneficiaries and 
4) Discredit Bitcoin just enough to permit either the passage of hefty ‘regulation’ or indeed allow for its eventual replacement with more anodyne alternatives. 

They all want to get us hooked on digital money, just not this kind. 

There was a marked dip pre-Xmas, but this may have been a response to the opening of futures markets which have made it easier to bet short, as well as some insider manipulation. Not quite the full debacle that would suit states and big institutions. 

And they really need this to happen before Bitcoin has wheedled its way further into the mainstream and a bursting bubble would inevitably pop the global economy rather more alarmingly. 

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