Bitcoin and Cryptocurrency

It’s an unseasonably warm sunny day in mid-November and the frenzy in the air is palpable. With the ring of a bell an onslaught of haggling, trading and price discovery begins, lasting until the final bell concludes the madness. These ‘traders’ walk through the doors smiling, pleased by the day’s ‘market’ action.

It was the mid-1990’s and baseball card mania was booming. As an elementary school student the playground was my trading floor. At the time, baseball cards were childhood collectibles to some, while for others their renewed popularity presented a way to monetize old childhood relics that suddenly had value. Today my vast baseball card collection resides in my basement, worth little more than the storage bin they make home.

Unbeknownst to me, this would mark my first experience with a speculative bubble. Surely, the dotcom bubble of the late 1990’s is a much more prominent memory. During this time of technological change, stock prices, particularly those of internet companies, traded at lofty valuations. To some skeptics these companies were losing millions of dollars a quarter and their stock prices were excessive. For believers the rally was a thrill of quick profits. Like with most bubbles, investors tried to rationalize the lofty valuations- maybe the skeptics simply couldn’t understand these changing times, this transformative technology. Ultimately fundamentals won, the bub

ble burst and investor capital was lost.

When watching a speculative bubble evolve it can be hard separating noise from facts. The work of New York University’s Stern School of Business and the book, ‘Manias, Panics and Crashes’ by Charles Kindleberger, do a solid job outlining the phases of a market bubble as summarized below:

Stages of a Speculative Bubble

Today, Bitcoin is in the news constantly. For those unfamiliar with Bitcoin, it is a form of digital currency that can be used to purchase goods and services anonymously online. However, to many, digital currencies are simply a means of speculative trading. Digital currencies are not backed by any government and are not regulated. They do not carry SIPC or FDIC insurance… and yes, any gains are taxable by the IRS.

Digital currency speculators are often seduced by the siren song of quick profits. Over the past few weeks Bitcoin mania seems to be frothing at an increasing rate. Recently, digital currency searches were among the top searched apps on Apple’s App Store and one of the most prominent Bitcoin investing websites had trouble keeping up with demand. There are stories of high school drop-outs who have become Bitcoin millionaires. Stories of Bitcoin that has been stolen. And astonishing stories of individuals mortgaging their homes to invest in Bitcoin. Additionally, the Chicago Board Options Exchange (CBOE), the world’s largest options exchange, recently launched futures contracts on Bitcoin… so traditional financial institutions have now found a way to profit on Bitcoin speculation, a party they have largely been kept out of.

If you find Bitcoin’s lure overwhelming ask yourself the following: During the bull market in stocks over the past 9 years have you ever considered stocks too risky, valuations too frothy, volatility too fearful? If so, perhaps a speculative investment in Bitcoin may not be an appropriate investment for you.

Most recently, one Bitcoin cost $18,500 U.S. Dollars, put another way $1 U.S. Dollar can buy 0.00005 Bitcoin. This seems, at best, questionable for something that is hard to consider a store of value with its high volatility, serves no industrial use, is uninsured, unregulated and not guaranteed by anything or anyone.

The outlook for Bitcoin is split between glowing optimism and dark skepticism, with the reality likely resting somewhere in the middle. But perhaps two old Warren Buffet adages sum it up best:

“The investor of today does not profit from yesterday’s growth.”

“…fear and greed, will forever occur in the investment community. The timing of these epidemics will be unpredictable. … We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”

Sources:
http://time.com/3741681/2000-dotcom-stock-bust/
http://content.time.com/time/subscriber/article/0,33009,996667,00.html
http://pages.stern.nyu.edu/~adamodar/New_Home_Page/invfables/bubbles.htm
http://www.mauldineconomics.com/frontlinethoughts/bubbles-bubbles-everywhere
https://www.sec.gov/oiea/investor-alerts-bulletins/investoralertsia_bitcoin.html
https://www.cnbc.com/2017/06/20/bitcoin-millionaire-erik-finman-says-going-to-college-isnt-worth-it.html
https://www.cbsnews.com/news/bitcoin-stolen-nicehash-hacked-btc-price-tops-19000-crashes-sharply/

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Marshall Financial Group, Inc (“Marshall Financial”) is an SEC-registered investment adviser with its principal place of business in Doylestown, Pennsylvania.   This newsletter is limited to the dissemination of general information pertaining to Marshall Financial Group’s investment advisory services.  Investing involves risk, including risk of loss.  References to market indices are included for informational purposes only as it is not possible to directly invest in an index. The historical performance results of an index do not reflect the deduction of transaction, custodial, and management fees, which would decrease performance results. It should not be assumed that your account performance or the volatility of any securities held in your account will correspond directly to any comparative benchmark index.

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