“A cryptocurrency is a digital asset designed to work as a medium of exchange using cryptography to secure the transactions and control the creation of additional units of the currency.”
(Definition from Wikipedia)
Bitcoin became the first decentralized cryptocurrency in 2009. Since then, numerous of these “altcoins” have been created, and of this writing there were more than 1050 of them available over the internet. A new cryptocurrency can be created anytime. Bitcoin is by far the largest in market capitalization and is the best known, followed by Ethereum, Bitcoin Cash, Ripple and Litecoin. Back in 2013, when the crypto market capitalization was about $1.7 billion, Bitcoin was 93% of the total. It is estimated the market cap of these “altcoins” is now in the $144 billion range, with Bitcoin still accounting for 47% of the total (source: Gartman Letter Sept. 20th 2017).
The chart below shows how prolific the price gain has been:
Bitcoin’s initial creation was with the intention of acting as a currency pricing mechanism to take the place of U.S. Dollars in the United States, or the Euro in Europe, the Yen in Japan, etc… The original beauty of it was that it was to have a finite supply and new coins were created by “mining” for them. But as we know, the supply of new crypto currencies has proven to be infinite.
Bitcoin supporters will argue that it qualifies as a currency because it’s something that parties can agree to accept as legal tender and a store of value. Using that definition, sure, it seems right.
But I would argue it has no intrinsic or underlying value, and unlike most fiat currencies, has no government standing behind it, or gold bars held in a vault behind it, etc… Fiat currencies have value simply because of faith in governments that issue them. When that faith is those governments vanishes, so do their currencies. I present to you what’s happened in Venezuela, and what happened to the Bolivar:
Or on the other side of the “bitcoin”, what happened to a country’s currency when government policies create unbelievable hyperinflation. I give you the Zimbabwe Dollar:
Bitcoin advocates think the future is bright:
- Very few people own it and demand is rising faster than supply
- The U.S. money supply is almost $14 trillion, so if even only 10% hold Bitcoin, it’s capitalization will rise from today’s $73 billion to $1.4 trillion
- The more people, retailers, etc. who accept Bitcoin, it will become more accepted as legal tender
The last line (to me) is what market cycles call the “greater fool theory” that lies at the heart of all speculative manias. Bitcoin prices were up almost 400% this year at one point and 3900% the last three years, but after hitting $5000 recently, it crashed back to down to nearly $3000, just in a couple weeks.
These crashes have been part and parcel of Bitcoin, where drops of 10%, 20%, and even 40% are not that uncommon. One day in 2013 it dropped 71% in 12 hours before rebounding (took 7 months) after news the Mt.Gox (holder of Bitcoins) announced they had a major hack where 850,000 Bitcoins were “withdrawn”. I still believe these cryptocurrencies, for the most part, have become popular in the arenas of antigovernment anarchists, drug dealers, money launderers, illicit arms dealers, tax dodgers, and users of the dark web. Last week China became the first to loudly crack down on the cryptocurrencies by going after, and banning digital exchanges. Could it be a socialist China sees more than the West?
I will side with Jamie Dimon, one of the best CEOs in the U.S.A., and I still believe Bitcoin will end like Tulip Bulb Mania, or any such manias, losses for many who can’t afford them, and a lot of blame and finger pointing, blaming others for that old vice called greed.
“It’s creating something out of nothing that to me is worth nothing.
It will end badly… Bitcoin is a fraud.”
CEO of JPMorgan, Jamie Dimon (Sept. 20th, 2017)
Stay tuned,
Vito Finucci, B.COMM, CIM, FCSI
Vice President and Director, Investment Advisor
Associate Portfolio Manager
This information is not investment advice and should be used only in conjunction with a discussion with your RBC Dominion Securities Inc. Investment Advisor. This will ensure that your own circumstances have been considered properly and that action is taken on the latest available information. The information contained herein has been obtained from sources believed to be reliable at the time obtained but neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers can guarantee its accuracy or completeness. This report is not and under no circumstances is to be construed as an offer to sell or the solicitation of an offer to buy any securities. This report is furnished on the basis and understanding that neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers is to be under any responsibility or liability whatsoever in respect thereof. The inventories of RBC Dominion Securities Inc. may from time to time include securities mentioned herein. RBC Dominion Securities Inc.* and Royal Bank of Canada are separate corporate entities which are affiliated. *Member-Canadian Investor Protection Fund. RBC Dominion Securities Inc. is a member company of RBC Wealth Management, a business segment of Royal Bank of Canada. ®Registered trademarks of Royal Bank of Canada. Used under licence. © 2016 RBC Dominion Securities Inc. All rights reserved.