Bitcoin – a bridge too far?
By Richard Matthews , December 8th 2017
Last night I watched a fascinating programme about one of my great heroes, Isambard Kingdom Brunel, a man who through his mastery of maths and extraordinary imagination revolutionised Great Britain at a time of innovation the like of which we had never seen before, The Industrial Revolution. At present we are in a similar era and since the invention and subsequent widespread adoption of the internet everything in our daily lives has changed from the way we shop, listen to music or bank and trade. Not everything Brunel tried succeeded but he left a legacy including the first tunnel under the Thames built the longest tunnel and widest suspension bridges (all still in use) the biggest steam ship for his time and a bridge that still stands in Maidenhead with the widest arches. All these changes were driven by the invention of steam power and the drive of the railways,
Similar to the widespread acceptance of steam power which changed industry between 1760 and 1840 the internet has changed how we do business indeed, I am now able to write this column surrounded by fields on a beautiful snowy morning in the country. Instead of drawing people into cities as the industrial revolution did the internet revolution has given people the option to work from where they wish to work from. Now I can sit and trade away at home and at least lose money in a comfortable environment and not even have to worry about my train fare home, and boy what a week for trading . Trading Bitcoin that is.
Last week we saw extraordinary changes in the price of Bitcoin as it surged from $11,000 to $16,000 and back down to $13,000. That’s in a week. I suspect that quite a few of my readers are ex LIFFE traders or indeed members of other exchanges workplace social groups. I mention this because there has been a stream of comment on Facebook and the rights and wrongs of Bitcoin for a few weeks now which has increased in tempo as the price climbs. There are a lot of salient points made regarding Bitcoin but I thought the most telling comment was that “A taxi driver told me that he was borrowing to invest in Bitcoin”. Whether that story was an urban myth or not it reflected the worrying trend that the casino that is Bitcoin is sucking people in. People who are driven by the greed and fear of someone else making easy gains. Every single aspect of a bubble is there now and it doesn’t matter whether it goes to $ 30,000 no commodity, and it is a commodity, with such volatility can be traded and there will be a serious shake out. If you doubt this just look at Silver in the 1980s when Nelson Bunker Hunt tried to corner the market, the real question is what happens then.
I wrote in my last column about bitcoin in August 2017 a month when the price moved from roughly $2700 to $4700 which now seems a long time ago and a relatively small movement compared to a week like last week ( 2nd December to 9th December ) when the price moved from $11,000 to $17,000 and back to $15,000. Extraordinary and despite appearances I have never seen anything like it as not even I am not old enough to remember Tulipmania. Lest anyone thing that Tulipmania and other bubbles were just for “ mug punters “ remember that Isaac Newton borrowed to invest in the South Sea Bubble and lost everything. Without a doubt a bubble and I am not going to be foolhardy to predict when it bursts.
What the bubble is doing though is drawing attention to these new” currencies” and educating us all on a new way of paying for goods and financing businesses as well as new forms of business . In August when I previously wrote about Bitcoin I was only just about aware what an I.C.O, (Initial coin offering) was and had never herd (I can’t resist a pun) of a server farm. Now they are increasingly talked off and the CBOE and CME are introducing/ has introduced Bitcoin Futures – which should be an interesting market to watch especially to see how large the open interest grows to as remember there is a finite number of Bitcoins in existence – unlike any other commodity or currency. Foreign Exchange houses are increasingly being drawn into the market and Central Banks are rumoured to be considering issuing e-currencies with Sweden the leading contender to do so. The introduction of a Central Bank backed currency will be the coming of age for this new transactional payment method and will have as big an impact on the world has the internet has had on the High Street. A truly international currency fungible with an underlying FIAT will facilitate huge growth in World trade as transactional costs are dramatically lowered and exchange spreads all but disappear thanks to the blockchain. Transactions will be instantaneous at tiny spreads and all of a sudden Visa and Mastercard charges will disappear as their technology becomes redundant.
Isambard Kingdom Brunel had his failures as well as his successes such as when he tried to introduce atmospherically propelled trains – a great idea but unfortunately not scalable. Like Brunel not all innovations have succeeded in the Internet age from phone operating systems to the early days of streaming and it’s not always the strongest that survive. As I wrote in August it may or may not be Bitcoin that survives but other Cryptos will. As Brunel completed the Box Tunnel in 1841 and first saw light at the other end he must have worried whether it was really daylight or the mythical gorilla with a flashlight. Much the same is happening with Cryptos there is starting to be light with the increasingly widespread understanding of them and trading volumes but is the volatility telling us something we would rather not hear? Are people investing in Bitcoin as a safe haven where money can be secreted away from the authorities prying eyes and in some cases using it to bust sanctions? Its noticeable that Gold isn’t reacting to World events in the way that it has done in the past and Bitcoin investment may be the reason or equally it may be that punters taking a chance on its volatility because Central Banks through QE have destroyed yield and value and there again they may not. Similar to the yield curve movements in China and The U.S. the markets are telling us something and that something is be careful there is a shock coming and the bursting of the Bitcoin bubble will add to our woes.