Bitcoin bubble fears grow
Published in Focus Malaysia on December 2, 2017.
The closing days of November has witnessed Bitcoin being subjected to a roller-coaster ride. On Nov 28’s overnight trading, it breached the US$10,000 (RM41,000) mark and continued its surge to briefly surpass the US$11,000 mark the following day.
Then came the litmus test. As if to underscore the volatility of this new-age investment, Bit- coin prices plunged nearly 20% in less than 90 minutes after a massive spike in exchange traffic led to outages.
Bitcoin’s volatility over the past few days have served as fodder for those who believe that the cryptocurrency is trading at speculative and unsustainable levels.
The big question mark is what is driving Bitcoin’s and other cryptocurrencies’ price surge, according to MTC Asset Management (M) Sdn Bhd co-founder & executive director Donovan Ng.
Originally, there was significant demand from all over the world from non-traditional investors, many of whom have lost confidence in the established financial systems governed by central banks.
Ng says that these investors see the unregulated cryptocurrency world as their saviour. On the supply side, Ng points to the fact that the availability of cryptocurrencies is limited. For example, there can only be 21 million Bitcoins at any time.
“Any small movements out of one asset class such as equities, bonds, and currencies into cryptocurrencies will generally drive a big surge,” he tells Focus M. “In view of the small supply, a sudden surge in demand is naturally going to force the price up.
However, there are concerns that Bitcoin and several other rival cryptocurrencies are attracting more speculators instead of investors who truly believe it should be adopted and utilised as a legitimate currency.
While there are signs of growing usage of the crypto- currency, iFAST Capital Sdn Bhd Tan Wei Yine is of the view that speculative activities are playing a big part behind Bitcoin’s current rise.
Similar sentiments are echoed by Kent Lee who is the co-founder of Specter Indus- tries, a provider of hosting services for mining machines. He, too, believes that the current cryptocurrency price trend is “mainly due to the speculative behaviour of investors and traders and not purely due to adoption and usage”.
Lee also attributes the Bitcoin surge to the hype surrounding Chicago Mercantile Exchanges introduction of futures trading for Bitcoin. According to him, this has led to many cases of betting and trading of Bitcoin rather than its actual use as an alternative currency.
Lee’s fellow co-founder Timothy Tan adds that while demand is growing, the adoption of cryptocurrencies remains at a nascent stage. He believes their true value can only be established once mass adoption takes place.
Tan foresees this happening only once more than 50% of the world’s population are able to comprehend as well as willing to adopt cryptocurrencies as legal tender.
However, such a level of adoption is seen as being far away given not all cryptocurrencies are seeing similar levels of excitement.
“In general, cryptocurrencies’ growth are heavily dependent on two factors. One being the speculative nature of a cryptocurrency and second being the utilisation and current development of the cryptocurrency,” explains Lee.
While the overall sentiment is bullish due to Bitcoin, there are other cryptocurrencies which have been falling because of weak utilisation and poor development. On the other hand, others are rising because of good utilisation and development.
While most believe that the price surge is being driven by speculators rather than actual adoption and usage, there are differing views on whether or not Bitcoin has developed a bubble that is close to popping. From a valuation point of view, iFast’s Tan argues that it is hard to determine Bitcoin’s true worth.
“Current buying interests are being fueled by speculation and hope that Bitcoin’s usage will eventually be adopted widely,” he suggests.
“Should there be any material threat that could shut off the possibilities of adapting further usage of Bitcoins, a sharp fall is likely on the cards.”
MTC’s Ng adopts a similar stance which he says is driven by his more conventional view on currencies.
“If people truly believe in Bitcoin as a currency, then currencies would not fluctuate and would not be as volatile as Bitcoin; it is as simple as that,” he asserts.
“Moreover, currencies have to be tied to an economy; in Bitcoin’s case, it is being tied to pure demand from a lot of non-traditional investors.”
In this regard, Ng believes that the tell-tale signs of the bubble popping is already there. “It just takes an instant for Bitcoin to fall [sharply] before coming back up again. I don’t know if it is something that is naturally sustainable,” he says. “If something is going up several thousand percent, it is not going to go up [at similar levels] the following year. It is close to impossible and if it does, it is almost certainly already in a bubble state and the next question is when will it pop,” expands Ng further.
However, Specter’s Tan takes a contrasting view by arguing that those who see a bubble do not understand the underlying blockchain technology behind cryptocurrencies.
“As cryptocurrency is at a very early stage, I believe the bubble will only surface when there is mass adoption and the market adjusts prices naturally,” he reckons.
He does not see this happening before cryptocurrencies hit 50% worldwide adoption and are accepted as a legal tender.
All agree, however, that investing in Bitcoin is not for the uninitiated, especially at current prices.
MTC’s Ng says at current valuations, investing is an “absolute no” because it is too expensive.
“Secondly, not many understand cryptocurrencies and I am a strong believer of investing only in things you are confident about – otherwise it is like taking a bet,” he stresses. Specter’s Lee agrees given much of the current market behaviour is driven by the “fear of missing out”. “Anyone interested in cryptocurrencies should understand blockchain technology first” is his reminder.
Broadly lower in Asia
Major Asian markets – except for Japan – ended broadly lower on Nov 30 on the back of drastic overnight technology stocks sell-off on Wall Street. This was despite the Dow Jones Industrial Average scaling a new high of 23,940.68 (up 103.97 points).
Japan’s Nikkei 225 edged up 0.57% or 127.76 points to 22,724.96 in stark contrast to Hong Kong’s Hang Seng index and South Korea’s Kospi index which plummeted to 29,177.35 (down 446.48 points) and 2,476.37 (down 36.53 points) respectively.
Elsewhere, China’s Shanghai Composite erased 0.62% or 20.67 points to 3,317.19 while Australia’s S&P/ASX 200 retreated 0.69% or 41.22 points to 5,969.89.
Brent crude rebounded to hover around US$63.50 (RM260.35) per barrel during Asian time trading after falling 50 cents overnight to settle at US$63.11.
The ringgit slipped 0.23% against the greenback to 4.0910 from the previous day’s close of 4.0817 while the FBM KLCI shed 2.52 points to 1,717.86 amid the lack of fresh leads.
Market breadth was negative with losers thumping gainers by 500 to 367. Trading volume rose to 2.47 billion shares worth RM6.03 bil from Nov 29’s 1.96 billion shares worth RM2.8 bil.