2018 Bitcoin Research Report

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Is BitCoin a Bubble ?

There may be good reasons for buying bitcoin. But the dominant reason at the moment is that it is rising in price. As of Writing this post, Bitcoin is Currently Trading Just shy of $20,000

PUT the word Bitcoin into Google and you get (in the U.S, at least) four adverts at the top of the list: “Trade Bitcoin with no fees”, “Fastest Way to Buy Bitcoin”, “Where to Buy Bitcoins” and “Looking to Invest in Bitcoins”. Travelling to work on the train this week, your blogger saw an ad offering readers the chance to “Trade Cryptos with Confidence”. A lunchtime CNBC news report visited a conference where the excitement about Bitcoins (and blockchain) was palpable.

All this indicates that Bitcoin has reached a new phase. The stock market has been trading at high valuations, based on the long-term average of profits, for some time. But there is nothing like the same excitement about shares as there was in the dotcom bubble of 1999-2000. That excitement has shifted to the world of cryptocurrencies like Bitcoin and Ethereum. A recent column focused on the rise of initial coin offerings, a way for companies to raise cash without the need for a formal stock market listing—investors get tokens (electronic coins) in businesses that have not issued a full prospectus. These tokens do not normally give equity rights. Remarkably, as many as 600 ICOs are planned or have been launched.

This enthusiasm is both the result and the cause, of the sharp rise in the Bitcoin chart in recent months. The latest spike was driven by the news that the Chicago Mercantile Exchange will trade futures in Bitcoin; a derivatives contract based on a notional currency. More people will trade in Bitcoin and that means more demand, and thus the price should go up. But what is the appeal of Bitcoin?

 

There are really three strands; the limited nature of supply (new coins can only be created through complex calculations, and the total is limited to 21m); fears about the long-term value of fiat currencies in an era of quantitative easing; and the appeal of anonymity. The last factor makes Bitcoin appealing to criminals (although this is even more true of cash).

 

These three factors explain why there is some demand for Bitcoin but not the recent surge. The supply details have if anything deteriorated (rival cryptocurrencies are emerging); the criminal community hasn’t suddenly risen in size, and there is no sign of general inflation.

 

A possible explanation is the belief that blockchain, the technology that underlines Bitcoin, will be used in the finance industry. But you can create blockchains without having anything to do with Bitcoin; the success of the two aren’t inextricably linked. Jamie Dimon the CEO of JP Morgan also mentions that Bitcoin is irrelevant when it comes to BlockChain Technology

A much more plausible reason for the demand for Bitcoin is that the price is going up rapidly (see chart). As Charles Kindleberger, a historian of bubbles, wrote There is nothing so disturbing to one’s well being and judgment as to see a friend get rich
Bubble

People are not buying Bitcoin because they intend to use it in their daily lives. Currencies need to have a steady price if they are to be a medium of exchange. Buyers do not want to exchange a token that might jump sharply in price the next day; sellers do not want to receive a token that might plunge in price.

READ
Trading 101: Your Guide to Getting Started
Check out what former Fed Chairman Alan Greenspan has to say about it

Here is what the Current Fed Chairman Janet Yellen’s Views

As Bluford Putnam and Erik Norland of CME wrote
Wouldn’t you have regretted paying 20 Bitcoins for a $40,000 car in June 2017 only to see the same 20 Bitcoins valued at nearly $100,000 by October of the same year?

 

People are buying Bitcoin because they expect other people to buy it from them at a higher price; the definition of the greater fool theory. Someone responded to me on Twitter by implying the fools were those who were not buying; everyone who did so had become a millionaire. But it is one thing to become a millionaire (the word was coined during the Mississippi bubble of the early 18th century) on paper, or in “bits”; it is another to be able to get into a bubble and out again with your wealth intact.

 Another issue with Bitcoins is Security, Since its Inception there have been numerous reports of Bitcoins being stolen from peoples wallets and Exchanges, Hackers hacking into the system and stealing Millions of Bitcoins, Due to the anonymity it’s even harder to catch the thieves (Almost Impossible). With Banks if you lose your money, You have a recourse, Someone or Somewhere to go to, Insurance etc. However with Bitcoins there is no recourse, You have no one to go to and the government wont be helping you out.
Nobel Prize Winning Economist Robert Shiller is known for his work on Bubbles, Here are his views on it

If everyone tried to realize their Bitcoin wealth for millions, the market would dry up and the price would crash; that is what happened with the Mississippi and the contemporaneous South Sea bubbles. And because investors know that could happen, there is every incentive to sell first. When the crash comes, and it cannot be too far away, it will be dramatic.
Checkout what one of the Best Hedge Fund Managers Ray Dalio has to say about Bitcoin

Here at Live Traders, we like to focus on markets that have proven themselves over time. Do we think it’s going to burst in the next six months? No, we personally like the idea of bitcoin, In fact when Bitcoin was trading around $1000, We at numerous times encouraged Buying Bitcoins, However, at these current valuations, it makes even a great idea seem out of whack.  However, We don’t like that it’s not backed by a standing army or by a force to pay taxes on it.

 

We have to pay our taxes in USD so the USD is always going to have more value than any other type of value we create, plus its backed by one of the greatest standing armies in the world. People keep talking about Bitcoins all this while using their cash and credit cards to live their day to day lives, This simply makes Bitcoin a instrument to speculate on.

 

Crypto currently is just general faith as long as people accept it and believe in it, which let me add can vaporize very quickly. Cryptocurrencies have demand, It’s not scarcity. If that scarcity of demand disappears, it’s gone. It could get legislated out and made more difficult which will then take away more of the demand. Governments do not like anonymity, They like to know where the money is and with whom and how the money is being moved across the world. So the risk is high as all it takes is one event to take place with the use of illegal Bitcoin money for the Governments to clamp down on it. There are already numerous black markets offering Drugs and other illegal substances in exchange for Bitcoin as a form of Payment.

 

We have faith in it to an extent, but its very short term faith. It’s not something we are looking to invest in when it comes to the long term. We are in stage three of this bubble. There will be another squeeze, the price will shoot through the sky and then the bubble will pop. When it pops it’s not the big financial institutions, fund managers, or banks that will get hurt. It’s the blind everyday consumer who will be destroyed.

 

Let’s look back to 2008. ” Ohh, wait I can buy a $200,000 asset with $5000 down, without any proof of income?” Of course, you’re going to go out and buy the house. The bank has all the liability and you have all the upside. You have $5,000 at your risk, if the house changes 10% in value you make 4x your money… Everyone remembers 2008…

 

Who Know’s Bubbles and Pump and Dumps better than the master Wolf of Wallstreet, Checkout what he has to say

This is what’s happening with bitcoin. people see the gains, the crowds come in and they’re trying to capture the 10x or 100x returns. It may seem like the rational thing to do but it’s dangerous. for every action, there is an equal and opposite reaction.

 

At Livetraders, we are not a fan of Cramer but its worth noting some of the keys points he made such as Bitcoin has very little do to with Investing. Here are some of his views

Our advice to you… Ride the wave, don’t wait too long to take your profit and while your riding that wave focus on learning the fundamentals of trading the foreign exchange market and U.S Stock Market which have been around forever and will continue to be around. Future as simply a Bitcoin trader is a high risk one. We tell the traders at our firm to Use Crypto’s and Bitcoin as a trading vehicle but not as an Investment. Trade it, Don’t Date it. The Patterns that we trade in the Forex and Stock markets work on Crypto’s too and it’s great to see our members profiting off these Moves. It’s the Bag holders that are eventually going to get hurt. It’s not a matter of If but simply a matter of When.
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