Bitcoin – The Truth Will Soon Be Known

I attended and moderated a panel at FXWeek Europe last week (29 November 2017) and the hot topic was Bitcoin. It got me thinking…

In December 1989 I was living in Japan and working for Citibank Tokyo. The yen had strengthened steadily over the previous four years from Y260 to Y123 against the dollar. Land prices were sky high and it was said that, if priced according to the cost of land nearby, the area of the Imperial Palace was worth more than Canada – or California – or France. A ¥10,000 note dropped in Tokyo’s Ginza district was worth less than the area it covered. Lavish and risqué nightclubs, such as Juliana’s, became a new symbol of Tokyo. I won’t deny that it was a fun time to be in Tokyo.

It felt like a bubble; it was a bubble.

The Nikkei 225 Index climbed above 13,000 in December 1985 reaching a high of 38,957.44 on December 29, 1989. The Nikkei 225 Index then lost 35% of its value in a single year. It has not, to this day, recovered.

So what has this got to do with bitcoin? One of several aggravating factors in the Nikkei’s fall was the contemporaneous development of equity derivatives in Japan. A new cohort of traders entered the market, many of whose members were overseas. This is what I think is about to happen to bitcoin.

On Friday December 1, the CFTC granted permission to the CME to launch bitcoin futures. CME has announced that they will launch bitcoin futures on December 18. The impact may not be immediate, but as traders gain experience and we see more short selling of bitcoin then we will learn if these new traders agree that that the current price north of $11,000 is sustainable. I am not saying that Bitcoin will necessarily crash – just that it will be “correctly” priced. However, I have an eerily familiar feeling.

It feels like a bubble; it probably is a bubble.

Roll on December 18.