THERE is a big difference between investing and gambling.
An investment into a property or stock is done with a view that there is a great degree of certainty that the money would make some returns in the long run. The element of comfort that the investment is backed by an asset that carries a fundamental value that can be calculated and verified.
For instance when investors put money into Sime Darby Plantations Bhd that saw a strong rebound last week, it is with a view of having an exposure to the plantation stock. Investors know the intrinsic value of Sime Plantations was much higher than its price when the stock fell below the RM5 mark.
As expected, Sime Plantations has bounced back. In the investment world, it’s called taking opportunity of “low hanging fruits” in the stock market.
Those who bought Sime Plantations when the stock fell below RM5 are looking at a gain of 10% over one-week.
That is called investing.
Sime Darby Plantations is the world’s largest plantation company by planted area and is slated to make closer to RM1.8bil a year in profits before tax. It has assets backing its share and strong cash-flow. In short, it runs a real business.
The same cannot be said for bitcoin.
Putting money into bitcoin for fear of missing out of the “action” is akin to taking a game of chance. It’s gambling in the hope that the digital currency that has seen a euphoric rise this year, despite warnings that it is a bubble waiting to burst, will continue to rise.
Stories on bitcoin and other cryptocurrencies are block busters.
It gains a lot of traction, indications that the digital currency has a following. A large number may be contemplating putting money into bitcoin and other cryptocurrencies while a small number would be dreaming of their paper gains – based on current prices.
In all probability, only a small number of smart “gamblers” would have sold out and realised cash.
More than 100 hedge funds have jumped into the fray, contributing to the significant jump in the price over the last three months. Ask any seasoned hand in the corporate scene and they will tell you that when hedge funds join the fray, speculation picks up.
Hedge funds, with their huge balance sheet supported by borrowings from banks, churn huge volumes and dump without mercy at the slightest of excuse.
Bitcoin, at the time of writing was testing US$19,000. A year ago is was less US$1,000. Now hedge funds are predicting it would reach US$40,000 next year.
No asset has any fundamentals to back up such a rise within a year.
Bitcoin and other cryptocurrencies are not governed by any central bank. It is not tied to any real indicators in the economy and the infrastructure supporting their trading is weak.
For instance, digital currency exchanges that facilitate the buying and selling of the nascent cryptocurrency are unable to cope with the increased volatility. Within minutes the price swings by more than 10%.
For instance in the leading digital currency exchange – Coinbase – Bitcoin went up by US$2,000 to US$19,000 and dropped to US$15,000 within a space of 20 minutes. The gap of US$4,000 left other exchanges baffled.
There are also cases of the digital exchange being a victim of cyber-security breach, losing the coins to hackers.
Bitcoin received a shot in the arm when two US based futures exchanges – CME Group and CBOE Global Markets – were given the green light to list Bitcoin Futures under a self-certified regime.
The self-certified regime is an approval for listing that comes with caveats. The futures exchange is required to monitor the derivative for potential manipulation and market dislocations such as sudden drops and spike in trading volumes.
Generally those in favour of the digital currency gaining recognition see the introduction of Bitcoin Futures, starting as early as next week, as a measure that would reduce the volatility.
Would that really be the case?
The jury is still out as even the Commodity Futures Trading Commission (CFTC), which regulates CME Group and CBOE, has warned that cryptocurrency remains largely unregulated, especially in emerging markets and its volatility must be watched carefully.
The mainstream financial institutions are fighting back, stating that the CFTF allowed futures trading of the digital currency without proper input from the financial industry and the decision should be reviewed.
The resistance is coming from the US’s Futures industry Association, whose members include some of the world’s largest players in the capital markets such as Goldman Sachs, JP Morgan and Morgan Stanley.
The brokers are influential because they own clearing houses, which act as the conduit between two parties undertaking a futures transaction.
Already there are reports that even though the CME Group and CBOE may list Bitcoin Futures, the clearing houses would not undertake any transaction unless there are instructions from their clients with the money being put upfront.
This effectively underlines the cautious stance that clearing houses are taking when dealing with Bitcoin Futures.
The next few weeks are crucial for Bitcoin and the digital currency world. When Bitcoin Futures starts to trade, it is the first time the real capital markets would trade with a security that is derived from the digital currency world.
To those already sitting on a pile of cash from their early gamble of having faith in bitcoin, best is to realise their gains. Because when it drops, it will be painful.