/ 10 November 2017

Bulls shrug off bitcoin bubble

(John McCann/M&G)
(John McCann/M&G)

In March 2014 United States tycoon and master investor Warren Buffett dismissed bitcoin as a mirage. At that time one bitcoin, a virtual currency, was bobbing around $600. This week, it is valued at near $7 500, after a bull run of note — growing 650% in value since January.

But this dramatic growth has only caused its critics to grow louder. Buffett stands firm on his view and, speaking to media this week, he described the cryptocurrency as a “real bubble”. Even though his warnings have been echoed by investment experts the world round, they appear to be falling on deaf ears.

If you bought a bitcoin in January, it would have cost $1 000 (R13 600 at the time). On Wednesday this week one bitcoin was worth $7 500 or R105 000. It is the world’s most popular cryptocurrency — a decentralised digital medium of exchange, not created or controlled by any one country.

Warren Ingram, the director of Galileo Capital, warned that bitcoin’s performance has all the characteristics of a bubble.

A bubble refers to a quick rise in an asset price, which is unwarranted by the fundamentals of the asset and driven by enthusiastic market behaviour, which is then followed by a sell-off and a contraction in the price.

Ingram said that investors need to distinguish between the asset and the revolutionary technology behind it — blockchain. Blockchain allows money to be sent safely and anonymously and is likely to revolutionise the way money is transacted.

Although blockchain will undoubtedly play a huge role, bitcoin’s future remains uncertain.

“They are two separate issues,” said Ingram. “In the 1990s, when the tech bubble burst, all, or most, of the businesses that were darlings of the market then don’t exist today.”

Most of the drive behind the bitcoin’s price is “sheer investor psychology and the fear of missing out”, he said. “The more prices go up, the more it becomes a self-fulfilling prophecy.” Those invested in it feel vindicated and those who sat on the sidelines now want to get in on it.

Cryptocurrency expert Mpho Dagada advocated for investment in the bitcoin and other cryptocurrencies, noting that the amount available is finite, which secures the value. To date, 16-million bitcoins have been issued, with only 21-million ultimately available.

Dagada said the value of the bitcoin has boomed, partly because of its rising popularity in financially strapped nations such as Zimbabwe and Venezuela, but largely because people see it as an alternative, safer way to transact. “Yes, risky, but safer as in not affected by human politics and greed,” he said.

Seven bitcoin investors who responded to the Mail & Guardian’s questions online have invested varying amounts in bitcoin — from R4 000 to R25 000 — this year and all have enjoyed handsome returns. One put R6 000 into bitcoin in September and it is now worth R11 500. Another put in R12 000, also in September, and has also nearly doubled the amount. One investor put in R4 000 in October and it is now worth R4 800.

Some were concerned about a bitcoin crash. “It is clearly unknown territory so, in my view, the coins could do almost anything,” one said, and another added: “At some point, it would need to get to a manageable equilibrium.”

Another was entirely unconcerned about talk of a bubble and a crash, saying: “I think this is a technology and currency that will change the way we store and evaluate assets.”

None were planning to cash in on their investment soon. “Never, or when there is a legitimate reason,” one said. “Will leave it there for a few years,” said another. One investor has withdrawn the original investment “so, even if it crashes to zero, I’ll have not lost anything”.

The 2017 MyBroadband Cryptocurrency Survey, completed by 1 600 respondents, found that bitcoin was by far the most popular cryptocurrency, followed by Ethereum’s Ether token.

On Wednesday, $300-million in Ether was lost forever following a series of bugs in a popular digital service.

The majority of the respondents (44.5%) held investments worth R5 000 or less, 20.68% held investments worth between R10 000 and R50 000, and only 3% had invested more than R500 000 in cryptocurrencies. Almost 80% of the respondents who owned cryptocurrency said they planned to invest more in the likes of bitcoin.

Getting back to the bubble, Ingram said a burst has never be caused by one thing but rather a collection of factors. “Perhaps someone develops a viable, well-supported cryptocurrency that immediately gains traction … or people who made money start getting nervous and start taking profits and soon a trickle becomes a flow.”

Elize Botha, the managing director of Old Mutual Unit Trusts, highlights the question of regulation. “Regulators worldwide are struggling to control the exponential growth of bitcoin, being a cryptocurrency that cannot be tied to any specific nation or economy.

“As a result, an increasing number of countries have begun to tighten their cryptocurrency regulations, with some going as far as to ban the trading of bitcoin and other virtual currencies altogether. Chinese regulators, for example, banned cryptocurrency exchanges and initial coin offerings two months ago,” Botha said.

Earlier this year, however, Japan passed a law to recognise bitcoin as legal tender.

Botha warned that investors should be careful not to be swayed by hype and should consider an investment’s long-term financial stability before making a hasty decision.

For those already invested in bitcoin, Ingram said they can still participate in the ride and make a profit by taking out half their money every time it doubles.

The treasury, the South African Reserve Bank, the Financial Services Board, the South African Revenue Service and the Financial Intelligence Centre have all warned the public to be aware of the risks of trading in virtual currency because there are no laws or regulations that address their use and this, in turn, means there is no legal protection or recourse.


How to bet against the cryptocoin – if you must

With so many investment experts warning of an inevitable bitcoin crash, you would think shorting the cryptocurrency would be popular.

Shorting, or short selling, is typically the sale of a security such as a company share, when an investor bets on a share price going down rather than up.

To do this the investor usually borrows a share with the belief that the price will decline. It is then bought back at a lower price, making a profit.

Shorting bitcoin is not easy but not impossible, said Jean Pierre Verster, a portfolio manager at FairTree Capital. Verster is known for shorting African Bank, which stopped trading when the South African Reserve Bank placed it under curatorship in August 2014.

He said there are two ways to short bitcoin, though he cautioned against it. “Bubbles always grow to become bigger than what one would think.”

One option is to borrow bitcoins from someone, promising to pay them back when they want them, and then sell the borrowed bitcoins on a bitcoin exchange for cash. If the bitcoin price drops, it will cost you less to buy bitcoins when the person you borrowed them from demands them back.

Otherwise, you can invest in the open-ended Bitcoin Investment Trust in New York. The code is GBTC US on Bloomberg, Verster said.

Its shares currently trade at a 43% premium to the value of the underlying bitcoins it owns, so one can short that with the help of the stock transfer agent (Grayscale Investments), plus you have a 43% “cushion” too. — Lisa Steyn