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Multi-Asset Blog - The biggest bubble of all time?

Wednesday, December 06, 2017

Will Bartleet, CIO and Portfolio Manager of Pacific Multi-Asset
Bitcoin: Let’s run through the bubble checklist

As Christmas parties start to fill the diary, there’s one subject everyone wants to talk about: Bitcoin. Blockchain is an innovative technology that creates an electronic ledger secured with cryptography whose applications range from the origination of corporate bonds* to simplifying the process of recording property titles.


However, it’s the application of blockchain to create cryptocurrencies that has caught the imagination of the public. Bitcoin, Ethereum and the other 1300 cryptocurrencies have people debating not just target prices but the relative attractiveness of newly created cryptocurrencies.

We can’t tell you at what price Bitcoin will peak at, and nor can anyone else. This makes it the perfect candidate for a bubble: the price can be whatever the market imagines it to be. There are 16.7m Bitcoins in circulation, increasing at a rate of around 660,000 per year. This might lead one to think that the inflation rate would be 4.1% and yet the price has risen 1982% over the last 12 months.

The interesting question for us is: when will it burst? Every investment cycle ends with a speculative bubble, be it in technology stocks, property or fine art; will Bitcoin mark the top of this cycle?

As with any bubble there are cynics and cheerleaders. They will both be tested: the cynics will be talked about in disparaging terms “He just doesn’t get it”. Whilst the cheerleaders have a difficult question to answer – will governments allow a rival currency to be created outside of their control? It has never happened before in the long history of money.

But is it a bubble? Let’s run through the checklist:

  • Advertisements for Bitcoin trading on the tube – CHECK
  • A plumber calling a colleague asking him how to trade Bitcoin – CHECK
  • A spike in “Bitcoin price” in Google Trends – CHECK
  • Reports of people leaving their jobs to be bitcoin traders – CHECK
  • Investment trust trading at large premium to NAV – CHECK

But there are some indicators missing

  • Bitcoin on the front page of a non-financial magazine or newspaper
  • Your neighbour bragging about how much money he has made in Bitcoin

It’s the last point that will tell you if it’s a proper bubble: if you’re feeling foolish for missing out, you can’t explain why it’s going up, but you can’t resist any longer, then we’re getting close to the top.

*Daimler pioneered the issuance of a €100m corporate bond using blockchain over the summer.

IMPORTANT INFORMATION | Issued and approved by Pacific Capital Partners Limited, a limited company registered in England and Wales, authorised and regulated by the Financial Conduct Authority . The information contained herein is not approved for use by the public and is only intended for recipients who would be generally classified as investment professionals. Information or opinions contained in this article do not constitute an offer to sell or a solicitation, or offer to buy, any securities or financial instruments or investment advice or any advice or recommendation in respect of such securities or other financial instruments. Where past performance is shown it refers to the past and should not be seen as an indication of future performance.

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