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Will bitcoin crash in 2018?

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Bitcoin Basics

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What are Bitcoins?

Bitcoins were developed in 2009 as a virtual, digital currency by one person or group with the pseudonym Satoshi Nakamoto. Bitcoins are not physically tangible and are thus also difficult to grasp mentally for many.

Although Bitcoins were originally conceived as currency, more and more investors (or speculators) regard Bitcoins as an own asset class – a kind of “gold 2.0”. This is the case because, much like gold, Bitcoins are also scarce. Once all Bitcoins have been mined, a maximum of 21 million will exist.

Only the vast minority of owners use Bitcoins as a form of payment; most use them as a store of value despite their high volatility. In December 2017, the first futures contracts denominated in Bitcoins were introduced. As a result, Bitcoins have now undisputedly achieved the status of an own asset class.

What is special about the blockchain technology?

The blockchain technology is a database that does not belong to anybody, i.e. it is regarded as decentralised. Nobody (that includes governments, companies, and persons) can manipulate the data this database contains. A network of computers administers the blocks of data chains (blockchains). Blocks are generated on a continuous basis – in case of Bitcoins, about every ten minutes. In these blocks, all transactions of all kinds are stored.

The generation of blocks is similar to a competition in the network. Whoever validates transactions first and solves a mathematical problem, receives the transaction costs included therein plus new coins. Once a network participant has found a solution, other participants check it and attach it to the chain. The blockchain technology is regarded as extremely forgery-proof and flexible. Due to its special characteristics, predictions for this technology are very optimistic, regardless of whether Bitcoins will prevail or not.

The price of Bitcoins exploded last year. Is this performance a bubble?

The performance of Bitcoins is indeed breath-taking. The first opening price of Bitcoins in 2010 was 6 cents (USD 0.06). Since then, the price has on average increased by a factor of 10 every year! Of course, this lures many speculators to the table. In 2017, the performance was even above the historical average.

The term “bubble” has been in use for a while now. Whether or not an asset has created a bubble is something you only know once it has burst, but unfortunately not before that. But after such a strong performance like the one we have seen over the past months, a correction is very likely. But even if the price were to fall by 50%, the long-term trend would still be intact.

What are the risks?

Bitcoins do not represent any value per se. The value depends on whether and how many people recognise Bitcoins as an asset class, and whether they will ever be used as means of payment. Currently, less than 1% of the world population use Bitcoins.

There are numerous risks:

  • Bitcoins are volatile. Their potential fluctuation exceeds that of equities by a factor of 10.
  • The interest in Bitcoins can disappear overnight.
  • Another cryptocurrency may take the spot of Bitcoins.
  • Regulatory risks: Bitcoins can be banned locally (i.e. in certain countries). However, a global ban is unlikely.
  • The mining of Bitcoins may become unattractive (i.e. offer little return), as a result of which the network might disintegrate.
  • Bitcoin trading platforms have repeatedly been the target of hacker attacks.
  • Many more

How can one invest in Bitcoins?

Bitcoins can be bought in various ways. The direct way requires an electronic wallet. After that, you can buy Bitcoins on a stock exchange or from a Bitcoin vending machine.

You can also invest in certificates or in an ETF. Futures contracts have been available for institutional investors since 17 December 2017 from the Chicago Mercantile Exchange.

Does Erste AM also invest in Bitcoins?

Erste AM is interested in the topic and keeps monitoring the development closely. At this point, Erste AM does not yet invest in Bitcoins.

 

Legal note:

Prognoses are no reliable indicator for future performance.

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Legal disclaimer

This document is an advertisement. All data is sourced from ERSTE-SPARINVEST Kapitalanlagegesellschaft m.b.H., Erste Asset Management GmbH and ERSTE Immobilien Kapitalanlagegesellschaft m.b.H. unless indicated otherwise. Our languages of communication are German and English.

The prospectus for UCITS (including any amendments) is published in Amtsblatt zur Wiener Zeitung in accordance with the provisions of the InvFG 2011 in the currently amended version. The simplified prospectus is prepared by ERSTE Immobilien Kapitalanlagegesellschaft m.b.H. and published in Amtsblatt zur Wiener Zeitung in accordance with the provisions of the ImmoInvFG 2003 as amended. Information for Investors pursuant to § 21 AIFMG is prepared for the alternative investment funds (AIF) administered by ERSTE-SPARINVEST Kapitalanlagegesellschaft m.b.H., Erste Asset Management GmbH and for ERSTE Immobilien Kapitalanlagegesellschaft m.b.H. pursuant to the provisions of the AIFMG in connection with the InvFG 2011.

The fund prospectus, Information for Investors pursuant to § 21 AIFMG, the simplified prospectus, and the key investor document/KID can be viewed in their latest versions at the web site www.erste-am.com or www.ersteimmobilien.at or obtained in their latest versions free of charge from the domicile of the management company and the domicile of the custodian bank. The exact date of the most recent publication of the fund prospectus or simplified prospectus, the languages in which the key investor document/KID is available, and any additional locations where the documents can be obtained can be viewed on the web site www.erste-am.com or www.ersteimmobilien.at.

This document serves as additional information for our investors and is based on the knowledge of the staff responsible for preparing it at the time of preparation. Our analyses and conclusions are general in nature and do not take into account the individual needs of our investors in terms of earnings, taxation and risk appetite. Past performance is not a reliable indicator of the future performance of a fund.

Harald Egger

Harald Egger is Chief Analyst and has worked at Erste Asset Management since 2001. Previously he worked for four years as a fund manager and analyst for AXA Investment Management in London. He headed the equity segment within Erste Asset Management and was CIO until April 2013. He has been employ...

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2 comments      1 Author Reply

  1. Dear Harald,

    thank you for sharing this interesting article. I am aware there so much hype going on around crypocurrencies these days so it’s hard to summarize all the features.
    Anyhow, just to add my humble opinion on this topic…I have a mixed feelings over the future of BTC or any other cryptocurrency. As you have written, there will be ultimately 21 mio BTCs mined in total (presumably by 2040). So, what happens next? What happens if the bitcoins will be concentrated and owned by only few people/organizations…? It will not be an effective medium of exchange. Neither it is today. As such, it may be labelled as a separate asset class, but it is not a store of value.
    Furthermore, out of 21 mio BTCs, there are already 4 mio of them lost forever:
    http://fortune.com/2017/11/25/lost-bitcoins/?lipi=urn%3Ali%3Apage%3Ad_flagship3_profile_view_base_recent_activity_details_shares%3BMakf6ipSRPCie0XXrBEhng%3D%3D
    Moreover, the BTCs platforms/owners are subject to frequent cyber attacks, frauds and thefts. Here is the latest one:
    https://btcmanager.com/second-biggest-theft-bitcoin-ever-bulgarias-bitcoin-mystery/?lipi=urn%3Ali%3Apage%3Ad_flagship3_profile_view_base_recent_activity_details_shares%3BMakf6ipSRPCie0XXrBEhng%3D%3D

    Some may argue that blockchain technologies will end the modern day banking transactions as we know it today. However, there are few important arguments against this thesis:
    https://www.weforum.org/agenda/2017/11/the-rise-of-bitcoin-doesnt-mean-the-end-of-banks-heres-why/?lipi=urn%3Ali%3Apage%3Ad_flagship3_profile_view_base_recent_activity_details_shares%3BMakf6ipSRPCie0XXrBEhng%3D%3D
    As you have pointed out…”Nobody (that includes governments, companies, and persons) can manipulate the data this database contains.” This may also be a source of a problem, as the above article illustrates.

    Last, but not least, bitcoin mining has had a negative effect on environment, as the electricity needed to operate the mining on a large scale is enormous. All the miners actually use a lot of electricity for mining, but only the fastest one that solves the mathematical probles collects the prize. Therefore a lot of effort, electricity and environmental damage (especially in countries where major source of electricity comes from coal-based electricity plants) is being crated in the process. That’s why we read articles like this one:
    https://powercompare.co.uk/bitcoin/?lipi=urn%3Ali%3Apage%3Ad_flagship3_profile_view_base_recent_activity_details_shares%3BMakf6ipSRPCie0XXrBEhng%3D%3D

    Speaking of bitcoin crash…statistically speaking it is imminent, but markets don’t always follow the history. This analysis (end of Nov 17) illustrates interesting facts:
    https://www.marketwatch.com/story/the-chance-of-a-bitcoin-crash-is-greater-than-80-2017-11-27?siteid=rss&rss=1&lipi=urn%3Ali%3Apage%3Ad_flagship3_profile_view_base_recent_activity_details_shares%3BMakf6ipSRPCie0XXrBEhng%3D%3D

    Looking forward to reading your next blog!

    Best regards,
    Sejad Imamovic

    1. Dear Sejad,

      thank you for your interest in our blog and your comment.

      Today the Bitcoin wealth is very concentrated, perhaps more than in the future. Although there is a hype in Bitcoin, not many people own the coin already. 1000 wallets own roughly 35% of all the bitcoins. But only 0,5% of the world population owns Bitcoins. The future will show if this wealth gets more spread, perhaps one day 3-5% of the population owns Bitcoins, that will change the concentration. Bitcoin is not an effective way of exchange daily expenses, it will never be, there are alternative coins which will be more effective, i.e. blocks are generated every 15sec, blocksize is bigger, etc. (for example DASH, or others). Bitcoin is a store of bigger sums, a kind of wealth reserve much like gold, you´ll never will use a gold bug for buying daily things. The development team of Bitcoins knows that but they don´t want to change it. It would be easy to build blocks every minute instead of 10. Just remember the Bitcoin system can handle 7 transaction/ sec, VISA or Mastercard can do 50,000.
      What I want to say is Bitcoin is a kind of gold, not cash, look for other coins when you want to use it for daily expenses.

      One day all Bitcoins are mined, right. What happens then?
      Today the reward for a block is ca. 200,000$, 25% transaction fees, the other 75% new coins, when everything is mined then only transaction fees will remain. This is still lucrative, maybe some miners will leave that opens the doors for others, you can still earn 50,000$ with only the transaction fees. The degree of difficulty is adjusted by the system, when miners leave it will be easier for smaller ones.
      Concentration of mines is a problem, when one miners controls 51% of the network trust will be destroyed. I can´t give you an answer if this happens.
      Bitcoins cannot be lost because they are saved in the Blockchain. Someone can lose his private key to access his bitcoins. But its true, some Bitcoins perhaps 20% are somewhere and no one has access to them.

      Consumption of electricity:
      I agree that is a problem. The blocks of Bitcoins are validated by the Proof of Work method, there are others proof of stake, farming,….
      When the majority thinks it is a problem then they can move to other cryptos that use the proof of stake method or farming. Maybe one day the mining will be regulated, that means one has to proof that his mining is clean.

      We are at the beginning of the story, many things will either change or disappear.

      Harald

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