bitcoin: Yep, Bitcoin was indeed a bubble and it popped

By Noah Smith

It seems like every asset bubble has a famous anecdote of someone claiming, right at the top, that a crash is impossible. In the stock-market bubble leading up to the Great Depression, it was economist Irving Fisher, who declared in the New York Times that stocks “have reached what looks like a permanently high plateau” a few days before a collapse that would see stocks lose 89 percent of their value. In 2007 and 2008, many optimistic pronouncements by current National Economic Council Director Larry Kudlow turned out to be disastrously wrong.

In the great Bitcoin bubble of late 2017, the honor goes to John McAfee, founder of computer security company McAfee LLC, and passionate cryptocurrency evangelist. On Dec 7, 2017, he wrote: “Bitcoin now at $16,600.00. Those of you in the old school who believe this is a bubble simply have not understood the new mathematics of the Blockchain, or you did not cared enough to try. Bubbles are mathematically impossible in this new paradigm. So are corrections and all else.”

A few days later, Bitcoin’s price briefly peaked at $19,511, before it began an epic plunge that would see the original cryptocurrency lose approximately 82% of that value as of the writing of this column.

Does that mean Bitcoin is dead? Not necessarily — the cryptocurrency has recovered from several previous bubbles and crashes, including one in 2011 that was just about as devastating. Also, it’s worth noting that even if they’ve held on to all of their Bitcoin (or HODLed, as many call it), early investors have still come out ahead in the latest bubble — the current price, though down spectacularly from the peak, is still more than triple what it was when 2017 began. And if they sold some of their holdings at or near the peak, as many are reported to have done, they’re in even better financial shape.

But for ordinary investors, who don’t tend to get in early on potentially revolutionary new technologies or to have the savvy or luck to time the market, the Bitcoin bubble should serve as a learning experience. The most important lesson is: Financial bubbles are real, and they will make your life’s savings vanish if you aren’t careful.

Formally, an asset bubble is just a rapid rise and abrupt crash in prices. Defenders of the efficient-market theory argue that these price movements are based on changes in investor’s beliefs about an asset’s true value. But it’s hard to identify a reason why any rational investor would have so abruptly revised her assessment of the long-term earnings power of companies in 1929, or the long-term viability of dot-com startups in 2000, or the long-term value of housing in 2007.

Similarly, there was no obvious reason why it made sense for the world to believe that Bitcoin was the currency of the future late December 2017, but to think this was less than one fifth as likely today. Bitcoin wasn’t eclipsed by a competitor — the main alternative cryptocurrencies had even bigger price declines. Nor have regulators cracked down on Bitcoin — in fact, the regulatory structure has generally been quite accommodating to the technology. Nor have critical technological flaws emerged — yes, the Bitcoin network has become congested, but this problem was anticipated well before the crash.

Instead, it seems overwhelmingly likely that Bitcoin’s spectacular rise and fall was due not to rational optimism followed by sensible pessimism, but to some kind of aggregate market irrationality — a combination of herd behavior, cynical speculation and the entry into the market of a large number of new, poorly informed investors.

It was this latter type of investor who got burned. There is no shortage of horror stories about people who poured their modest life’s savings into what looked like a sure bet, only to see it vanish — some of it into the pockets of Bitcoin’s early-investor aristocracy, some of it into thin air.

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Bitwise Launches Bitcoin Fund, Driven by Client Interest – The Bitcoin News

Bitwise Asset Management has launched two new cryptocurrency funds, one of which only invests in BTC. The launch “is driven by inbound client interest and investor dissatisfaction with existing options,” the company says. The market downturn has also given investors “a unique opportunity to enter the market at prices many thought we’d never see again.”

Two New Funds

Bitwise Launches Bitcoin Fund Driven by Client InterestBitwise Asset Management announced on Wednesday that it has launched two new funds: the Bitwise Bitcoin Fund and the Bitwise Ethereum Fund. The former only holds BTC and the latter only ETH, in addition to “any meaningful hard forks and air drops,” the company states. According to the announcement:

The launch of the funds is driven by inbound client interest and investor dissatisfaction with existing options, many of which carry premiums, charge exit fees, have lockups, and/or charge expenses to the fund outside the stated management fee.

Bitwise Launches Bitcoin Fund Driven by Client InterestThe company explained that 100 percent of the funds are held in cold storage. Kingdom Trust is the custodian of both funds. Contributions to the bitcoin fund can only be done by “U.S. bank wires and BTC,” Bitwise’s website shows.

Starting on Wednesday, two share classes are available for both funds. The first, aimed at institutional investors, has “an all-in expense ratio of 1.0% and a minimum investment of $1 million,” the company described. The other has “an all-in expense ratio of 1.5% and a minimum investment of $25,000.” Subscriptions and redemptions are accepted every Wednesday, “with no lockups, withdrawal fees, or performance fees,” the announcement details.

Existing Index Funds

The two funds launched on Wednesday are the company’s second and third strategies, the announcement clarifies, adding that the first is “the broad-market Bitwise 10 Private Index Fund.” This fund tracks the cryptocurrencies in the Bitwise 10 Index, “which is a basket of the largest coins, weighted by 5-year diluted market capitalization and rebalanced monthly,” its website describes. The constituents of this index are currently BTC, XRP, ETH, XLM, BCH, EOS, LTC, ZEC, XMR, and DASH.

In addition to the Bitwise 10 Index, the company has three other indices: the 20 mid cap, the 70 small cap, and the 100 total market.

Furthermore, the company has partnered with Morgan Creek Capital Management to offer investors another index fund called Digital Asset Index Fund. According to its website, this fund “tracks the Morgan Creek Bitwise Digital Asset Index.” Its current constituents are BTC, ETH, BCH, EOS, LTC, ZEC, XMR, DASH, IOTA, and NEM.

Clients Are Interested

Bitwise CEO Hunter Horsley commented:

The 68% drawdown in bitcoin prices this year has given investors a unique opportunity to enter the market at prices many thought we’d never see again.

He added that, while “an ETF [exchange-traded-fund] has not yet been approved, investors and advisors like the fund format because it’s professionally managed and simplifies access to best-in-class custody, trading, reporting, and tax preparation, and allows for the safe capture of events like hard forks and airdrops.”

The company’s global head of research elaborated:

Our clients have been adding to their positions throughout the downturn, and many who’ve been following the space for a while are using this opportunity to finally come in.

What do you think of Bitwise’s various crypto funds? Let us know in the comments section below.

Images courtesy of Shutterstock, Morgan Creek Capital Management, and Bitwise Asset Management.

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Dundee Man Faces Court Over Alleged Bitcoin Money Laundering Scheme • Live Bitcoin News

The cryptocurrency industry attracts people from all strides of life. Some want to save up some money for a rainy day. Others want to get rich quick at all costs. One man in Dundee, Ireland is wanted for a major money laundering scheme linked to Bitcoin. This investigation has been ongoing for some time now.

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An initial inquiry into the habits of Dale Pearson commenced in early 2018. This individual is a person of interest in a money laundering investigation. His tainted funds passed through various banks in different countries. Eventually, it also found its way to Bitcoin, according to the Evening Telegraph. The world’s leading cryptocurrency is often associated with illegal activities. In this case, there may be something to those rumors.

The habits of Pearson involve duping companies through the United Kingdom. By obtaining a hefty mortgage he successfully bought two properties in Dundee. This was all made possible thanks to his illegal operation. Pearson is also responsible for laundering money through shops and outlets across Europe. In the end, the total tally sits at 1 million GBP.

Furthermore, charges against Pearson include supply various drugs and possession of narcotics for distribution. His first court hearing occurred in April and has remained in custody ever since. It now seems the situation has taken another turn. He will face the Dundee Sheriff Court on December 18. Whether or not there will be a jail sentence, is unclear at this time.

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Laundering money often requires anonymity and privacy. With Bitcoin, neither of those aspects are present. The native transparency of the Bitcoin network makes it nearly impossible to move funds without alerting someone. Especially with so many blockchain analysis companies active today, any dubious transfer is flagged immediately.

Even though Bitcoin is associated with crime, it isn’t a good tool. Instead, criminals usually have more success by relying on traditional finance. It is very difficult to convert Bitcoin to fiat currency in an anonymous manner. All service providers perform thorough KYC checks. This also allows exchanges to link strange activity to a real-world identity.

To date, few reports confirm there is a money laundering scheme involving Bitcoin. Despite its current value, Bitcoin isn’t liquid enough to facilitate large-scale operations. Pearson is allegedly a member of a major criminal organization. They are not in a position to wait for Bitcoin traders to complete. As such, the role of the world’s leading cryptocurrency in this case remains rather unclear at this time.

What do you think about Pearson’s case? Let us know in the comments below.

Images courtesy of ShutterStock