Digital currency mania ratcheted up quite a few notches last week, setting up bitcoin on a trajectory towards the stratosphere, after the announcement that CME Group would launch a bitcoin futures contract by the year’ end.
Bitcoin is already easily the fastest-growing bubble in history having soared to a total value of $US125 billion last week but the link into mainstream financial instruments and the gearing effect possible using easy-to- trade futures has potential for mind warping hyper-mania.
Or it could crash to zero — as many still believe the bits and bytes on bitcoin exchange ledgers are worth. Underscoring the risks, the price crashed 30 per cent over the weekend to a low of $US5605.
But the world economy is afloat on bubbles from stocks, to bonds and housing, and under this global mindset anything is possible with digital currencies until there is a classic exponential blow-off and collapse that makes speculators realise the real risks.
Until now trading bitcoins and other “crypto currencies” has not been easy, but while not exactly the same as “owning” the, um, “real” thing, bitcoin futures open the mania to the mainstream.
“Like the Dot.com boom in the late 90s, a dominant digital currency technology or two could well emerge to make real changes to our world, but picking the right ones amounts to a total guess unless you are a highly informed tech geek with access to a time machine.|”
So investors, from big institutions to small retail ones with an online trading platform, will be able to indirectly pay thousands of dollars, maybe even tens of thousands of dollars to own futures linked to some bits and bytes held on a complex digital “distributed ledger” known as a blockchain.
A meteoric gain of more than 900 per cent over the past year must spark conflicting emotions of greed and fear in prospective speculators.
But fear should be the dominant emotion because the soaring gain disguises the fact that trading bitcoins has not been for the faint-hearted.
During this time it’s had 10 falls of 20 per cent or more, including a 40 per cent crash just last month.
Since then it soared 165 per cent to a peak of $US7882.
Remarkably, bitcoin is tame compared with other digital currencies.
They move so quickly its hard to keep track, but Ethereum is up about 3500 per cent since the start of the year and some smaller digital currencies have soared more than 10,000 per cent.
The interest has spawned more than 1000 other digital currencies which are sold via “initial coin offerings”.
All this is the very definition of asset bubble mania, but for the past five years all the naysayers have been spectacularly wrong.
Does that mean you should rush out and buy one?
Not unless you are willing to lose every single cent of the speculative splurge.
Bitcoin remains the market leader but its $US125 billion total market value is small relative to the total value of gold and US dollars and Aussie dollars in circulation.
Which is why so many see a tremendous upside.
Like the Dot.com boom in the late 90s, a dominant digital currency technology or two could well emerge to make real changes to our world, but picking the right ones amounts to a total guess unless you are a highly informed tech geek with access to a time machine.
And there are some interesting justifications for the frenzy.
Last week, Casey Research’s Doug Casey argued that a reason to be bullish about bitcoin was that it would soon be embraced by people in Third World countries with trash national currencies.
Black market trading of US dollars has thrived for decades in Africa, Asia and South America, but one simple fact of life remains overlooked, and its been the same problems in these struggling countries for decades.
In order to buy bitcoins, Zimbabweans, Somalis or Iraqis first need to find someone willing to exchange bitcoins for their near-worthless paper currencies.
Sure, they could go to the black market and buy greenback notes at an exhorbitant price, somehow find a way to deposit them in a US bank for a hefty fee, ready for transfer at another fee once bitcoins have been purchased.
However, while there are currently about 16.6 millions bitcoins in circulation, up about two million in two years, they soon will be part of a finite “currency” pool.
By design, only 21 billion bitcoins can be “mined” in total by computers around the world, and if they remain in demand the price will rise to some unaffordable level that will take them out for the reach of the masses.
Perhaps another lower-value digital currency will fill some demand void, and that would likely eventually undermine bitcoin prices.
Therein lies the real problem with digital currency speculation. There are currently no limits to prevent hundreds or thousands from being created, and governments will follow too, making those they don’t like illegal.
What is an initial coin offering?
An initial coin offering is the unregulated means by which funds are raised for new cryptocurrency ventures. An ICO can also be referred to as an ‘initial token offering’ depending on the context.
ICOs typically vary in nature and may raise funds for a variety of projects, including the development of a new cryptocurrency or distributed ledger technology (such as blockchain) related services.
Anyone with access to the internet can create or invest in an ICO.
In order to prevent fraud, securities regulators around the world are planning to establish rules for ICOs.
The Australian Securities and Investment Commission said the legal status of an ICO was dependent of the circumstances of the ICO, “such as how the ICO is structured and operated, and the rights attached to the coin (or token) offered through the ICO”.
“In some cases, the ICO will only be subject to the general law and the Australian consumer laws regarding the offer of services or products,” ASIC said. “In other cases, the ICO may be subject to the Corporations Act.”