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Preparing for BitCoin's bubble bursting
Jezzer
Posted: 17 December 2017 16:49:57(UTC)
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So MoneyWeek did an article recently on how to prepare your portfolio for the Bitcoin bubble bursting, saying that a collapse in the value of crypto-currencies, when speculators (inevitably?) run for the hills, would infect other asset classes. Their recommendation (as usual) was 'buy gold'. I'd be interested in the forum members' views on: -

  1. How much a collapse in crypto-currencies might infect other asset classes (especially since last week instruments were launched to allow shorting on Bitcoin)
  2. Is it worth holding some [extra] gold in preparation?
  3. If you prefer holding cash to gold, would you be ramping up the %age of your PF that's in cash at the moment? To what level?


Thoughts welcome.

No need for a debate on the merits or otherwise of 'investing' in crypto-currencies!

Jez
Micawber
Posted: 17 December 2017 16:57:18(UTC)
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So, how much 'real' money have investors invested in Bitcoin? (Not the value of bitcoin now, but how much they took out of cash and other assets to put into Bitcoin). If that's a tiny figure compared with the value of all market assets, then I don't see why a bitcoin crash would contaminate other assets. Indeed, it might boost them....

Moneyweek just needs about three alarmist headlines a week to sell the mag.
3 users thanked Micawber for this post.
Tim D on 17/12/2017(UTC), Jezzer on 17/12/2017(UTC), dlp6666 on 18/12/2017(UTC)
Sara G
Posted: 17 December 2017 17:05:24(UTC)
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I may be wrong but I think the impact would be limited as the market isn't big enough yet - it isn't like sub-prime when contagion spread through the whole system. Where there is a risk is if a high proportion of the money flowing into digital assets is on margin - if it's a big number then some people, mostly naive speculators who have been piling in recently, will lose their shirts.

I think there are plenty of reasons to hold some gold but this would not be top of my list... But if Bitcoin were to carry on rising at the expense of gold, then I'd be tempted to sell some of the former to buy the latter.

As regards cash, I do hold more than is typical for me and will increase this slightly in the coming year, but that's more about valuations in mainstream markets being high and (to my mind) there being no value in bonds.
2 users thanked Sara G for this post.
Jezzer on 17/12/2017(UTC), Micawber on 18/12/2017(UTC)
Stephen B.
Posted: 17 December 2017 17:10:24(UTC)
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I haven't seen any concrete statistics, but my impression is that so far the "investor" base has been fairly narrow due to the technical hurdles involved, so I wouldn't expect any major impact. The introduction of derivatives could change that a bit, but probably it will burst before it gets too significant.

Fundamentally what a bubble does is reallocate money from some people to others, and in itself that doesn't especially affect the macro picture. What can cause an impact is if you get large numbers of ordinary people losing substantial chunks of their savings, but that doesn't seem likely here - although of course it will happen in individual cases. If people are borrowing to buy bitcoins that could generate wider trouble, but I've not seen any evidence for that.
1 user thanked Stephen B. for this post.
Jezzer on 17/12/2017(UTC)
Fell Walker
Posted: 17 December 2017 17:30:29(UTC)
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Bitcoin lost 20% on November 30th and no one really batted an eyelid. It's a shame it recovered so quickly.

Bitcoin loses over a fifth of its value in less than 24 hours
Keith Cobby
Posted: 17 December 2017 17:32:04(UTC)
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Typical ponzi scheme. A few people get rich and many lose their money. A known/known and will have no effect at all on the markets. I don't like references to 'investing' in Bitcoin as it's a bit (pun intended) like investing on the 4pm at Newmarket.
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Fell Walker on 17/12/2017(UTC), Guest on 20/12/2017(UTC)
Jezzer
Posted: 17 December 2017 17:41:01(UTC)
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Thanks folks. I did read that Coinbase surpassed Schwab in terms of number of accounts, recently, which is amazing. So the volume of interest in crypto currencies must be high now. Amount of cash invested is likely to be relatively tiny at present I guess...
Stephen B.
Posted: 17 December 2017 17:42:16(UTC)
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Except that bubbles are self-generated Ponzi schemes, people are effectively conning themselves! This will in future make a good textbook example of a "pure" bubble, because there is no underlying asset at all (at least tulip bulbs could be used to grow a tulip) and the supply is essentially fixed as mining is now very hard, so the only way for people to buy in is for someone else to sell.
3 users thanked Stephen B. for this post.
Jezzer on 17/12/2017(UTC), Keith Cobby on 17/12/2017(UTC), Tim D on 17/12/2017(UTC)
chubby bunny
Posted: 17 December 2017 19:09:00(UTC)
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I don't think a Bitcoin crash would have any significant effect on stock markets. A lot of the money will move into the other top 10-by-market-cap coins, unless governments clamp down on cryptocurrency in general.
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Sara G on 17/12/2017(UTC), Freddy4Skin on 17/12/2017(UTC)
Alan Selwood
Posted: 17 December 2017 21:31:24(UTC)
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I, on the other hand, think that if Bitcoin crashes and burns, other crypto-currencies will be tainted by association. This is what happens to companies when one of them produces a bad report - the others go down in sympathy, as investors start to question the solidity of their beliefs in the future of that sector.

As to any wider impact of (or probably 'when') Bitcoin burns out, the FT this weekend thought that it would be slight/negligeable.
2 users thanked Alan Selwood for this post.
Tim D on 18/12/2017(UTC), Micawber on 18/12/2017(UTC)
Alan Selwood
Posted: 17 December 2017 21:36:51(UTC)
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Would I buy Bitcoin? No way!

(Of course, I would not mind a bit of time-travelling back to the point when the price was minimal, with the sure knowledge that I would be able to sell my holding last Friday, without risking anything other than the creation of a giant cash balance at the bank!). This example of the Greater Fool Theory would, of course, rely on the suffering of others later - the ones who bought from me.

Oh, Robert Heinlein, where are you when we want to take financial advantage of your fantasy writing from 50 years ago?
Jezzer
Posted: 17 December 2017 21:58:50(UTC)
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chubby bunny;54349 wrote:
I don't think a Bitcoin crash would have any significant effect on stock markets. A lot of the money will move into the other top 10-by-market-cap coins, unless governments clamp down on cryptocurrency in general.


Surely the point is that the money would have gone.

Agree with Alan - the fright would taint all other crypto currencies, just like Tech was tainted for a decade after the dot com bubble burst.
King Lodos
Posted: 17 December 2017 22:04:35(UTC)
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Interesting piece that made the point: for Bitcoin to become useful as a currency, it has to stop growing in value .. Otherwise how do you lend or borrow? If you borrowed Bitcoin to buy a house, could you owe £50m next year?

At the same time, the market cap of Bitcoin needs to be much larger to be a major currency, which means it has to rise a lot more.

Once it stops rising, all the speculators drop out (being that it's still no use as a currency) .. So presumably, even if Bitcoin does become a standard, it's not going to be a linear ascent .. It could be a succession of bubbles .. But also perhaps demonstrates the impracticality of a currency without central control of supply



Stephen B.
Posted: 17 December 2017 22:12:40(UTC)
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It should possibly make people appreciate central banks a bit more, that they do in fact stabilise currencies to the point that we get excited about inflation being 3% rather than 2%. Bitcoin boosters see the absence of legal controls as an advantage, but the consequence of that is a "value" that swings wildly and in the end has nothing to underpin it. The basic question once any bubble starts to deflate is "how low can it go", and in this case the answer is clearly zero.
3 users thanked Stephen B. for this post.
Jezzer on 18/12/2017(UTC), Mr Helpful on 18/12/2017(UTC), Alan Selwood on 18/12/2017(UTC)
Tim D
Posted: 18 December 2017 00:06:40(UTC)
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Interesting Reuters piece a few days ago on "cross contamination" issues; envisages some desperate hedge-funds might get in trouble, which then might or might not spread to the wider markets.
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Jezzer on 18/12/2017(UTC)
Jezzer
Posted: 18 December 2017 10:42:00(UTC)
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Thanks Tim. That sums up nicely what I was trying to get across in my original post. Early days, but perhaps something to keep an eye on, now that futures contracts are available.
Stephen B.
Posted: 18 December 2017 10:51:56(UTC)
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The Reuters piece seems very speculative - hedge funds are run by intelligent people and the risks of gearing to buy something so volatile are obvious. When hedge funds have run into trouble it has generally been because a relationship which has been stable in the past ceases to be so, but in this case there is no stability in the first place.
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Jezzer on 18/12/2017(UTC)
Stephen B.
Posted: 18 December 2017 10:56:18(UTC)
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And by the way, if we have derivatives the obvious thing to do might be to be short, but that's also dangerous because the price may go a lot higher before it goes down.
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Jezzer on 18/12/2017(UTC)
jvl
Posted: 18 December 2017 11:21:53(UTC)
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Sara G;54334 wrote:

I think there are plenty of reasons to hold some gold but this would not be top of my list... But if Bitcoin were to carry on rising at the expense of gold, then I'd be tempted to sell some of the former to buy the latter.


Sara G;54334 wrote:

As regards cash, I do hold more than is typical for me and will increase this slightly in the coming year, but that's more about valuations in mainstream markets being high..


You think valuations in mainstream markets are too high but you'd happily buy more of Bitcoin if it keeps rising against gold, despite it having nothing more behind it than the possibility to sell on to another person and its price chart making tulips look sensible?
2 users thanked jvl for this post.
Keith Cobby on 18/12/2017(UTC), Alan Selwood on 18/12/2017(UTC)
Mr Helpful
Posted: 18 December 2017 11:24:19(UTC)
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Stephen B.;54368 wrote:
The Reuters piece seems very speculative - hedge funds are run by intelligent people and the risks of gearing to buy something so volatile are obvious. When hedge funds have run into trouble it has generally been because a relationship which has been stable in the past ceases to be so, but in this case there is no stability in the first place.


Maybe at a slight tangent, or not ?
from wikipedia :-

"Douglas Adams wrote in Mostly Harmless, "a common mistake that people make when trying to design something completely foolproof is to underestimate the ingenuity of complete fools"
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dlp6666 on 18/12/2017(UTC)
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