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      20 Feb 2018

      The Cryptocurrency craze

      As the popularity of Cryptocurrencies booms, new waves of experts are offering us their recently discovered expertise to educate us from being Crypto-confused to Crypto-savvy.

      They claim that they’ll teach us how to make Bitcoin, Litecoin, Etherium or Ripple our new income streams, urging us to attend their webinars, free events, workshops and bootcamps. Yet, only a year ago many of these Cryptocurrency experts and self-proclaimed Crypto-nerds were property marketers or computer programmers.

      Unlike these crypto-experts, Cryptocurrencies have been around since 1996 and the earliest, such as Beenz, e-Gold and Rand are long gone. In the last ten years their number has escalated so we have Litecoin, Swiftcoin, Namecoin, Bytecoin, Dogecoin, Feathercoin, Emercoin, Gridcoin, Primecoin, Auroracoin, Mazacoin, Blackcoin, Titcoin, Vertcoin and Burstcoin. At my last count there were over a thousand varieties of altcoins, or Cryptocurrencies to choose from.

      While that should already sound warning alarms, there’s a far bigger issue at play here, which is the risk for investors when booms turn into bubbles. While booms may be founded on genuine demand, bubbles are fuelled by speculative buying frenzies which have nothing to do with the underlying utility value of the asset being purchased. They only last while more and more investors are lured in by the apparent certainty of massive financial gains and they can end without warning.

      EXPONENTIAL GROWTH FED BY SPECULATION ENDS BADLY

      There are many examples of booms turning into speculative bubbles, such as the Katoomba land boom which ended in disaster for thousands of mum and dad investors when the bubble burst back in 1890. The Wall Street stock market crash of 1929 wiped out billions of investor funds in just a few days and more recently the mining house market crash in towns such as Moranbah from early 2013 financially ruined many property investors.

         
         

       

      The graphs showing these price crashes all look the same, with escalating demand and rising prices turning into a speculative buying bubble as more and more investors get sucked in. Then the bubble suddenly bursts and prices crash to levels lower than they were before prices starting rising.Whether it’s land, houses, shares or any other tradeable commodity like Bitcoin, the lesson is that exponential price growth fed by pure speculation without underlying utility value often ends in disaster. As the graph above shows, Bitcoin could be the next bubble about to burst.

      CRYPTOCURRENCIES HAVE GREAT INVESTMENT RISKS

      Assets have value because they provide cash flow or capital growth and sometimes both. Housing, for example, delivers cash flow from rent and can also provide growth potential based on genuine demand for accommodation, but the only value that Cryptocurrencies offer comes from pure speculation. This means that the investment risks associated with Bitcoin and the others are much greater than with other commodities.

      The other difference between land, housing, shares and Cryptocurrency bubbles is the speed at which the crash occurs when the bubbles burst. The easier and quicker it is to buy and sell, the greater the volatility and speed at which the fall in prices occurs. When housing bubbles burst, the slide in prices can still take years, but Cryptocurrencies are easily and quickly traded, with a turnaround of only ten minutes and this means that investors could face ruin without any warning.

      Cryptocurrencies such as Bitcoin were developed as secure and verifiable mediums of exchange, designed to work digitally through public transaction databases rather than central banking systems. This honourable aim is now being hijacked by the spruikers to present them as get rich quick opportunities, which they may well be for them, if not for us.