 |
Have you heard about the investment that was priced at $986 on January 2nd of this year and hit $16,939 on Monday? It's the same investment that experienced a 5-year return of an astounding 12,700%. The investment is a cryptocurrency known as Bitcoin. It's been getting a LOT of press this week because Bitcoin futures began trading Sunday evening on the Commodity Exchange (CBOE), the first "Wall Street" exchange to list the digital currency. And the direction after listing was straight up.
Bitcoin Explained
Bitcoin was invented as a peer-to-peer system for online payments that does not require a trusted central authority. The core innovation that makes Bitcoin special is that the Bitcoin network is not run by a single country, company or person. The system is run by a decentralized network of computers around the world that keep track of all Bitcoin transactions.
The result is a system where payments are non-reversible, accounts cannot be frozen, and transaction fees are much lower.
Each bitcoin has a complicated ID, known as a hexadecimal code, that is many times more difficult to steal than someone's credit-card information.
And, since there will be a finite number to be accounted for (21 million), there is less chance that Bitcoin or fractions of a Bitcoin will go missing. Every four years, the number of Bitcoins released relative to the previous cycle gets cut in half and, as a result, the number of Bitcoins in circulation will approach 21 million, but never actually reach it. This means Bitcoin will never experience inflation (unlike US dollars, whose buying power can be diluted when the Fed decides to print more money).
The price of Bitcoin fluctuates constantly and is determined by open-market bidding on Bitcoin exchanges, similar to the way that stock and gold prices are determined by bidding on exchanges.
This most recent massive run up is not based upon production, earnings, profitability, market share, or interest rates --- the measures that tend to drive security pricing. Instead, it appears to be driven by Investor FOMA, "Fear of Missing Out".
This weeks mania surrounding Bitcoin reminds us of another mania...the "Tulip Mania" of the 1600's.
Tulip Mania
In the 1620s, tulip prices had already risen to incredible levels. One story involved an entire townhouse offered in exchange for just 10 bulbs of the very special cultivar, Semper Augustus (shown to the right).
Although the offer of the entire house for just 10 bulbs was incredible in its own right, the fact that the offer was rejected outlines just how unimaginably valuable tulip bulbs had become.
Speculators piled into the markets like wildfire, trading the bulbs rather than the actual flowers, which resulted in what you might call a futures market.
As word spread that one could make ridiculous sums of money by buying and selling the bulbs, prices skyrocketed even higher.
As is the case with economic bubbles, the price finally rose to an unsustainable level. Investors began to exit the market, which caused a domino effect as more and more tried to sell at ever decreasing prices. No one is completely sure what led to the cataclysmic demise of the bulb trade, but what is certain is that it caused widespread panic. Even those lucky enough to get out early were hurt later by the economic depression caused by the Tulip crash.
Bottom Line
Will Bitcoin go the way of the Tulip? No one can say for sure. And,
some humility is required, because naysayers (like ourselves) poo-pooed Bitcoin when it was priced at $100. However, the facts remain, cryptocurrency valuation has no basis. It is not backed by the full faith and credit of a recognized entity such as a central bank (like currencies) or by physical assets (like commodities). Nor is it regulated in any way.
Kevin Roose echos our thoughts in his New York Times article yesterday entitled "I was Wrong About Bitcoin: Here's Why" when he says:
"I naively thought that what people liked about money was its stability, and knowing that $100 today would still be worth $100 tomorrow.
But you know what's more popular than stable monetary instruments? Casinos! People love to gamble, and the spectacular rise of Bitcoin - especially in the age of social media, which tends to hasten trends and encourage bandwagon behavior - has encouraged a set of thrill-seeking speculators to bet big on the currency, hoping to make a quick buck and get out before a crash."
Our advice when you're considering an investment in Bitcoin? Do two things: 1) use extreme caution, and 2) remember the Tulips.
|
|
|
Last week the major equity indexes were mixed with large cap stocks recording gains and small caps and the Nasdaq recording losses. Economic data was also mixed. Reports of service sector activity came in below expectations and the trade deficit widened more than expected. On the other hand, Friday's jobs report was positive with employers adding 228,000 jobs last month.
|
|
> Interest Rates:
As anticipated the Federal Reserve chose to raise the Federal Funds rate another quarter point at the conclusion of today's meeting. It is the Fed's third quarter-point bump this year. Policymakers, along with many economists, are puzzled by wage growth and inflation that remain modest despite a 17-year low in unemployment. But, they're holding to the belief that worker shortages will eventually drive paychecks and consumer prices higher.
> Equity Values:
For the first time ever, world equity index market capitalization is a whisker away from $100 trillion. The total value of companies listed on the world's stock markets at the end of November was $98,750,067,000,000.
> Equity Volatility:
The surge in equity values noted above has been accompanied by a drop in price swings. 60-day equity market volatility dropped below that of bonds for the first time ever this year.
|
|
Christmas got you down?
Christmas isn't for everyone. Of course, there are those who don't celebrate for religious or cultural reasons, but there are also those who get fed up with the malls, the traffic, the 24/7 Christmas music, the parties, and the general expectations of it all. If you're in that category you might get along with this grumpy Siberian husky, who - judging by this image - might hate Christmas more than you.
|
|
|
Image of Anuko, the "grumpy" Siberian Husky, posted on social media by Jasmine Milton
|
|
|
New Market Wealth Management offers modern investment solutions backed by extensive research and experience serving the needs of wealthy families. Through our strategic partnership with
Cliffwater LLC
, we have access to institutional-quality research, investment due diligence and asset allocation tools. We believe this level of experience and unique access to in-depth, sophisticated research are essential for success in today's complex world markets.
|
|
|
|
| |
|
|
|
|
