Headline of the year: The Bitcoin frenzy.

As many newspapers are choosing their “person of the year”, I believe that the headline of 2017 was the frenzy attached to bitcoin. From Facebook news feeds to digital marketing campaign to push people to trade bitcoin, and endless number of articles posted on different digital platforms and other newspapers they were all discussing about the same topic: Cryptocurrencies.

Indeed, before 2017 cryptocurrencies were not well known among the general public, however it became very popular this year and offered profits that no other assets ever recorded in such a matter of times (as far as I know!). In fact, Bitcoin recorded an astonishing return this year with (at the time of writing) a return of 1,1437% from an initial price of $979 on the 1st of January to $15,050 today. I won’t start telling you how much you could have generated if you invested $1,000 in 2010-2011… because at that time who knew where it would go but also because this point has been used over and over.

While many people call it a currency’s revolution whilst many others call it a scam, in my opinion I think it is a very interesting asset to look at.

The ideological roots of Bitcoin and other 1300+ other cryptocurrencies stem from the need for decentralising the current monetary system, shifting the power and control assumed by the government and big banks to the masses. This refreshing notion of empowerment aims to make the financial system as free and transparent as possible, through complex cryptographic technology. This technology is called Blockchain, and its encryption features allow high degrees of security and privacy.

 It has been highly used in countries where their citizens lost faith in their own currencies such as citizens of Venezuela. However, enhancing privacy and anonymity regrettably became a natural attraction for criminals and those engaged in illegal activities, and therefore became the main narrative behind cryptocurrencies.

However, owning bitcoin doesn’t qualify you as a criminal, but embracing this privacy and anonymity shows that you simply want to redeem your right and have control about your own privacy and how you control your money. Although, many people recently invested in Bitcoin not because of this but mainly to jump in the bandwagon of making money real-quick, if demand is higher than supply then price will increase. 

However, the supply of every currency is controlled by some function, and in the case of the Bitcoin it is through the process known as “mining”. Mining a bitcoin is done by solving math equations/problems in the exchange for the currency by using expensive software and hardware.

However, mining bitcoin is not easy as it sounds which assure bitcoin users that they won’t ever be a massive over supply in the digital market place, nonetheless with this year fluctuation in the cryptocurrency world, it causes a major problem. It incentivises miner to hoard the currency upon receiving it which is one the main causes of Bitcoin’s price volatility (it is estimated that 25% of Bitcoins mined never entered the marketplace). The solution would be to mandate miners to exchange all new mined bitcoins for another currency, otherwise it will come a point where Bitcoin miners will control the supply which in a way it is not really any better than a central bank!

 What I learnt through my job and experiences is sometimes when it is too good to be true, you have to be careful. As Warren Buffet once said:

As of today, investing in Bitcoin can be very risky. With Bitcoin being very expansive at $15,000, the downside risk is very high thus it needs to be look at with caution. But again, being expansive is very subjective as if one day bitcoin reach $50,000, we will look back and say it was quite cheap. You should do like professional traders, set yourself a profit target and crystallise these gains once reached. The main mistake that you could do is to become greedy and emotional about your investment.

I am a big believer in blockchain technology, but the way cryptocurrencies are acting today don’t make any sense to me. As a long term investment, I wouldn't touch it. Bitcoin has a short history with a lack of intrinsic value and insane volatility thus making it an asset which is hard to ever recommend, either to my clients or to include in my own portfolio. However, the concept of it where I explained a part of it above is for me absolutely great. Then again, I see it more as a gamble and just a way to make a quick profit, instead of being used for its original purpose. Bitcoin has an investment is for me pure and simple speculation. And the way it is used nowadays results in having a deflationary effect where you wouldn’t spend any bitcoins now if you know that the value will be higher the next day or in a near future. Gresham's Law in economics suggests that for a complementary currency to be successful, it needs to have an inflationary effect that exceeds inflation in the national currency.

 So, for anyone that are jumping in the frenzy storm now, beware and don’t put all your eggs in the same basket. Invest with the knowledge that you can lose it all if all goes south!

Happy trading.