The year 2017 has cryptocurrencies written all over it as investors celebrate 12 months of jaw-dropping disbelief with the likes of Bitcoin, Ethereum and Ripple outperforming all other established and traditional asset classes – with more than a thousand-fold return year to date. Leading the crypto-pack is Bitcoin that smashed the US$16,000 barrier recently extending its stratospheric escalation to new records – this after coming into 2017 at US$725 in mid-January. With the exponential surge of virtual currencies, we are now bound to ask if anything about its surreal meteoric rise has the vestige of a bubble surrounding it.
Meanwhile, the Oracle of Omaha [Warren Buffett], when asked some three years ago what he thought of cryptocurrencies, set off alarms by declaring that Bitcoin, then valued at around $600, was a “mirage” and a “joke”. As of this publication we have no further reliable comment from him. As soon as we have, we will let you know.
If there is anything out in the crypto world right now that could puncture a bubble – it would be a fork. “Hard Forks”, also known as digital “forks in the road” refer to paths in the blockchain computer program which at some point will have to diverge in two directions. When this happens, every one must decide which direction to take and choose a path that is better for the digital currency. So far, Bitcoin has experienced three major “hard fork situations”, where factions in the Bitcoin community have been warring over seemingly technical questions. This has created three blockchain paths for that crypto superstar, with three new sets of coins; Bitcoin Cash (BCH), Bitcoin Gold (BGT) and Segwit2X (B2X).
The same hard fork situation also happened to Ethereum – one group wanting to change some major flaw with the system and another party wanting it left untouched. Those who continued with the “original” blockchain protocol remained as Ether Classic (or ETC), while those who implemented an upgrade changed their tokens to “ETH”.
Potentially, as more and more parties are getting involved in this digital play every day – there will at some point be technical and maybe legal issues that are fermenting its way in the very near term. One Bitcoin community may want to succumb to government scrutiny and regulation; one may prefer to put caps on its daily rate increase or decrease (floor and ceiling) to prevent wild volatilities, and one group may want to leave the Bitcoin blockchain program untouched. And possibly, these are issues that may cause Bitcoin to split, and deflate in value, creating new derivatives of that coin in the process.
Ultimately, we can all thank Bitcoin for opening the doors for digital money and promoting a broader awareness of the blockchain technology. But despite its spectacular performance, Bitcoin is becoming more and more fragmented with more contesting candidates and forks emerging. It is then our strong position not to hold any crypto coin for the long term, but to trade it as opportunities arise.
Like any gold rush, it is wiser to invest in shovels. It’s the same narrative why we are cautiously looking at blockchain platforms that support a feasible business idea. As we have mentioned before, and continue to ponder since George Soros took a 9% stake, Overstock (OSTK) is seen to rival the retail platform of Amazon but with a payment system that fully supports and acknowledges Bitcoin. So a buyer from the US can purchase goods in China without being bothered by the currency restrictions and exchange rate hassles as both parties can transact and trade across country borders with one digital currency.
It is for this exact reason why we now urge investors not to get too excited with the digital currency, but look to buy the technology instead.