Bitcoin bubble embodies our bipolar year of optimism and doubt
Andrew Sheng says cryptocurrency has some clear vulnerabilities that make its current highs temporary, but before the coming market correction, optimistic traders will carry on as they did before the 2008 global financial crisis
Goldman Sachs planning to establish a trading desk for cryptocurrencies, including bitcoin
Since the market value of all cybercurrencies already exceeds US$200 billion, and regulators allow both futures and initial coin offerings to open and trade, if and when institutional investors also get into the game, any collapse of the bubble will be widespread and catastrophic.
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The authorities’ complacency smacks of the “monumental collective intellectual failure” that did not foresee the 2008 global financial crisis. If the reversal of the cybercurrency bubble causes systemic failure like in 2007-08, then be assured the regulators will ask for more laws, powers and blame it all on “shadow players”, where no one needs go to jail, no regulator is negligent and we can solve all this through more investor and consumer education.
A reversal of this bubble seems unavoidable, taking down smaller players. Of course, since algorithms or computerised trading accounts for up to half the total trading in some markets, it would not be surprising that every drop will be an opportunity to buy the market higher. Hence it is quite possible the market will continue to trade higher for a while, but it cannot defy gravity forever.
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Basically, the financial markets are riding on expectations that economic growth is recovering everywhere. But any unknown trigger could send it crashing. We live in a simultaneous knife edge of massive greed and bottomless fear – including the fear that we will miss the upside.
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The real question is whether a flat US Treasury yield curve, which historically signalled a slowing economy, will come true or not. Optimists think the US tax cuts will keep boosting the market, while Trump opponents argue the reverse.
Unbounded optimism happens when there is what Charles Kindleberger calls displacement – a phenomenal event that disorients rational thinking. The 18th century South Sea Bubble happened because great fortunes were made in colonies from growing cotton using slave trade.
Even Isaac Newton lost a fortune playing stocks. As he famously said, he could calculate the motion of heavenly bodies, but not the madness of people.
We now live in an age of wondrous technology, at a time of great change that brings hope as well as despair of the unknown. This explains our euphoria and worries. 2018 will be a year of great hope for optimists and despair for pessimists. Enjoy the bubble while it lasts. Happy New Year to all.
Andrew Sheng writes on global issues from an Asian perspective