The Bitcoin Bubble

8 December 2017 By PDSNET

Over the past few years the emergence of cryptocurrencies, and particularly, Bitcoin has attracted much media comment and speculation. Your software includes a chart of the US dollar price of Bitcoin since 2010. It is like no other chart you have ever seen mainly because it is not a share or even a derivative. Many of our clients ask us whether they should be investing in Bitcoin and our answer is: "Probably not". This answer is based on our normal approach to any investment and that is to consider what the true value of the underlying asset is - and then compare that with the price that it is trading for in the market.

Thus, a share represents a part-ownership of a company and you can examine the company, consider its potential for generating profits and dividends in the future. This will give you an idea of how much you should be paying for it now. Shares oscillate from being over-priced to being under-priced in relation to the dividend-generating potential of the underlying company. However there is no asset to back your Bitcoin (or any of the other 800 cryptocurrencies now in circulation) and so you cannot consider the fundamental value of what you are buying. You are only buying it because somebody else might buy it back from you in the future for a higher price. This is the stuff that bubbles are made of. Historically the first recorded market bubble was the market for tulip bulbs in Denmark in 1630 (the so-called "tulip mania"). Here the asset was rare and valuable tulip bulbs that could produce exotic blooms. The public got involved in this bubble and many people invested their entire life savings. The price of bulbs sky-rocketed, only to then collapse, bankrupting most investors. The key here is that a market becomes dangerous when it goes up exponentially and when everyone (even people who know absolutely nothing about it) get involved. That is exactly what is happening with the Bitcoin market. Consider the chart of Bitcoin since January 2015:

Bitcoin Spot Price US Dollar - Chart by ShareFriend Pro

Charts like this simply do not exist in the financial markets not even in derivatives or even currencies. This is an absolutely classical exponential chart. As the idea of Bitcoin catches on world-wide everyone wants to get involved and that is pushing up prices to ridiculous levels. Thus, on Monday this week (4th December 2017) a Bitcoin could be bought for $1130. On Tuesday it closed at $1170, on Wednesday it reached $1276 and on Thursday $1620! Clearly, this rise in prices cannot be sustained. And when it falls it will probably fall very quickly as millions of novices suddenly get scared and panic. The people who make money from bubbles (as with pyramid schemes) are those who get in early and then get out while demand is still strong. Our advice: If you don't have Bitcoins, stay well clear. If you have them sell while the going is good.  


DISCLAIMER

All information and data contained within the PDSnet Articles is for informational purposes only. PDSnet makes no representations as to the accuracy, completeness, suitability, or validity, of any information, and shall not be liable for any errors, omissions, or any losses, injuries, or damages arising from its display or use. Information in the PDSnet Articles are based on the author’s opinion and experience and should not be considered professional financial investment advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. Thoughts and opinions will also change from time to time as more information is accumulated. PDSnet reserves the right to delete any comment or opinion for any reason.



Share this article:

PDSNET ARTICLES

The Confidential Report - March 2021

America
The major change that has come about in America since the advent of the Biden administration has been a broad shift towards “risk-on”. The uncertainties associated with Trump are fading. American investors have welcomed the economic logic and sanity of the new administration with a desire to generate returns which are well above those offered by US Treasury

Naspers

Naspers is the largest share on the JSE with a market capitalisation of R1,67 trillion. Naspers was founded in 1915, as a printer and publisher of newspapers and magazines. It has since evolved into an international social media, entertainment and gaming company.

This share has the problem that it is undervalued in relation

Sibanye Vs Amplats

Right now, comparing Amplats with Sibanye is instructive for private investors – and made more interesting because:

  1. They are both mining houses producing precious metals, mainly platinum group metals.(PGM's).
  2. They have the same financial year-end (31st December).
  3. They have both recently produced trading statements for the 2020 financial

Hudaco

In the current environment investors should be looking for listed companies that have managed to weather the COVID-19 storm and emerged with strong growth. These companies would have had two important components before the pandemic began – a strong balance sheet and highly competent management. Hudaco had both.
Hudaco is a company with two primary divisions:

  1. The

The Confidential Report - February 2021

America
The relatively calm installation of Joe Biden as president and the Democratic Party’s control of Congress were appreciated with relief by markets worldwide. The S&P has risen by almost 18% from its low of 3270 on 30th October 2020 to its recent high of 3855 on 25th January 2021. Biden has promised further substantial stimulation

Elimination of the Bears

As far back as January 2016, billionaire George Soros went short on the S&P500 index. This means that he thought the S&P500 was going to fall heavily and he took positions which would profit from a major fall in that index. Later in May 2017 he doubled up on those “short” positions and he has been taking more short positions ever since. As recently as final quarter of 2020 he bought

Truworths

Truworths (TRU) is a retailer of fashionware in South Africa and the UK. As such its business has been damaged by the impact of Brexit in the UK and the recessionary conditions in the South African economy. Both countries have then been impacted by lockdowns which prevented in-store sales for a period of time, beginning in late March 2020. The second wave of the pandemic has also been a factor. In the UK,

The Coming Blow-off

At the start of 2021, it is as well to stand back and consider the context of where world markets are as they slavishly follow Wall Street up to new record highs.  Consider the 12-year chart of the S&P500:

 
The chart shows that the great bull market which began in March 2009 is on-going. It is moving within a clearly defined channel.

Window Dressing

We all know that our market, the JSE, is dominated by the big institutions – the pension funds, unit trusts, insurance companies and a scattering of large fund managers. These institutions together account for at least 90% of the trades on the JSE by value. We private investors make up the rest.
Big institutions have huge holdings of mostly blue-chip or

The Rand Bull

For some years now we have believed that the rand was underpriced in relation to the currencies of first world countries, especially the US dollar. We have also said that the rand, as one of the most heavily traded emerging market currencies, is a barometer of the international investment community’s perception of risk in the world economy. When investors