Bitcoin madness without an end?

The fourth industrial revolution has brought with it major change and innovation in many fields and has given rise to the world’s first digital currency or first digital commodity in the form of bitcoin.

The sharp rise of bitcoin and other cryptocurrencies recently has created a lot of interest in this market but there have been questions and arguments including that it is not a real currency, that there is no place for it in an investment portfolio and that it is simply fraud.

To further unpack this issue, Antje Hargarter, Dean of School of Investment and Banking chatted to Manfred Huebner, managing director of Sentix in Germany. Huebner is an expert in the fields of sentiment analysis and behavioural finance, and a Certified European financial analyst. With the Sentix Global Investor Survey, he has developed the leading sentiment barometer in Europe. He conducts research and has the role of chief strategist, based on 25 years of experience in the capital markets.

Antje: Manfred, thanks so much for sharing your thoughts on the bitcoin topic with us. What do people expect when they invest in bitcoin? Is it a search for the ultimate, manipulation-safe, inflation-free alternative form of money? Or is it pure greed?

Manfred: Thanks for inviting me to speak about this fascinating subject. Can you believe it: since May of this year, the price of bitcoin has doubled yet again! At the same time, this bubble – like many other bubbles – can get much bigger before it bursts! To my mind, investors make a number of wrong assumptions about bitcoin.

Antje: What are some of those assumptions, in your opinion?

Manfred:Investors who purchase bitcoins believe that they are indeed investing in an alternative currency. However, they actually acquire ‘digital assets’ from another person. Any one euro that a buyer spends will not ‘flow’ into bitcoin but will increase its intrinsic value. Any euro spent will go directly to the seller. Due to the scarcity of the supply and the speculative increase in demand, prices are rising. And let’s be clear: it is the price that increases, not necessarily the value!

Antje: That sounds very similar to stock market speculation?

Manfred: Indeed. What drives stock prices are speculative feedback loops - the price drives the demand, which in turn drives prices even higher because of scarcity. The underlying company did not necessarily experience any increase in value from a fundamental point of view; we are only talking about a stock price increase. Price and value of a company can decouple easily in reality.

Antje: Sounds plausible. The stock market will function slightly differently though, won’t it? In the case of a listed company, their share prices rise, leading to an increase in the valuation of the company. A takeover of competitors can be financed through the stock exchange by issuing new shares, which is not possible with bitcoins in conceptual terms.

Manfred: Correct. Besides this, there is also a significant difference between bitcoin and classical currencies: when investors move their investments from the euro to the US dollar, the inflow of capital influences real-life flows in goods. A sharp rise or fall in the exchange rate would have real economic consequences for both ‘currency areas’, which is why equilibrium prices are set and speculation is less encouraged.

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