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Why popular Bitcoin could become the ultimate bubble

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Summary

  • Even some early skeptics have turned believers.
  • Just a week ago, in a research note to clients, analysts at JP Morgan now predict that Bitcoin holds the potential for significant additional gains over the long term.
  • The move marks a huge reversal on its previous skepticism, which saw JP Morgan chief executive officer Jamie Dimon threaten to fire anyone caught trading the asset. Some see the world’s number one cryptocurrency doubling in value before year-end.

Many years ago when Scelidosaurus roamed the earth, for a season, one song ruled the airwaves driven by a catchy yet soulful hook; “We are never gonna survive, unless we get a little crazy.”

I recently discovered -to my pleasant surprise- that the tune, co-written and sang by Seal, was actually inspired by the fall of the Berlin Wall and Tiananmen Square Massacre in 1989.

Now, in a world witnessing revolutionary ideas, speedy innovations and rapid tech evolutions, just to survive, one really needs to get a little crazy. But are we getting too crazy for our own good?

Someone please explain why bitcoin bulls think markets drive on one side of the road? Why do they think it’s a better trade than gold? What is bitcoins’ fundamental value upon, which to base a realistic price?

Now, I know there is no shortage of support. Many of bitcoin bulls will be quick to point to the fact that there can only ever be 21 million bitcoin because of a stipulation set forth in its original source code as a factor that is likely to confer a higher price upon the asset now and in the future.

Even some early skeptics have turned believers. Just a week ago, in a research note to clients, analysts at JP Morgan now predict that Bitcoin holds the potential for significant additional gains over the long term, with the possibility of its price rising as high as Sh14.6 million as institutional investors continue to pad their portfolios with the cryptocurrency at the expense of gold.

The move marks a huge reversal on its previous skepticism, which saw JP Morgan chief executive officer Jamie Dimon threaten to fire anyone caught trading the asset. Some see the world’s number one cryptocurrency doubling in value before year-end.

On the other hand, skeptics point out a couple of concerns; the daily Relative Strength Index (RSI) is currently 72.13. Values of 70 or above indicate that an asset is becoming overbought and may be primed for a trend reversal or experience a correction in price. An RSI reading of 30 or below indicates an oversold or undervalued condition.

Its price volatility is also insane. For instance, in 2017 bitcoin prices rose by more than 20 times, but in early 2018 fell by 70 percent; similar sharp drops have in fact already occurred five times before (June 2011, January 2012, April 2013, November 2013, December 2017).

Intrinsic value

In addition, market sentiment remains high according to the Fear and Greed Index. The reading stands at 95, which means pricing levels are at extreme greed level.

In my own analysis of these facts, I believe bitcoin is the ultimate bubble — stuff that occurs when speculators bid up prices of an investment beyond its intrinsic value.

What we are currently witnessing is the “madness of the crowds.” Whether now or later, a trip down to mother earth is a sure thing.

While it is definitely tempting to get swept up in the current excitement, please heed these words of caution: “If you find honey, eat just enough -- too much of it, and you will vomit.”

In other words, crazy should have limits.

Mr Mwanyasi is the managing director at Canaan Capital