A
“bubble” is simply an economic cycle with rapid increase of asset prices
followed by a sudden shrinkage. Such phenomenon is driven by enthusiastic
market behavior, causing a rapid surge in asset prices. Once the asset price
reaches to a point when investors are not willing to buy in such elevated
price, an enormous sell-off would happen which leads to crushing the bubble.
Bubble is created in economies in the form of securities markets, stock markets
and business sectors due to a dramatic change in investor’s behavior. In the
past, the Dot-Com boom during the 1990s had investors buying technology stocks
at high prices, which an arbitrage of elevated asset prices and overrated
market confidence eventually led to a massive market plunging. In other words,
the development of a bubble originate from a surge rise market prices,
overestimated the assets’ true value. Following by assets being strongly over
valuated, causing prices to drop into reasonable price range.

           

Crypto-currency was introduced into the market
when inventor, Satoshi Nakamoto developed a “Peer-to-Peer Electronic Cash
System” (Reference 1), each peer has a record of the entire history record of
every transactions and each account’s balance. “Blockchain” is a fixed
historical record of previous transactions once transaction gets confirmed. The
role of crypto-currency miners is to confirm transactions into blockchain and a
token of the crypto-currency would award to miners. Crypto-currencies have
limited supply that is not changeable by a bank, government and other financial
institutions, which allow a consolidated control by manipulating supply. As
Litecoin storms into the crypto-currency market, we have the advantage over
bitcoin in terms of guaranteeing a faster transaction, bigger amount of token
issued and a more advanced mining algorithm which reduces the risk of forgery
before a transaction being confirmed.

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Market confidence and market
volatility:

JP Morgan’s boss, Jamie Dimon said “the digital
currency was only fit for use by drug dealers, murderers and people living in
places such as North Korea.” (Reference 2) Jamie believes that the
crypto-currency is a limited market that is perfect for illegal transactions
and trading. In the past, Bitcoin have been associated and involved in online
crime and money laundering. A day after JP Morgan’s Jamie Dimon called the
currency a fraud at a conference in New York, Bitcoin’s value fell 6%, showing
how volatile and doubtful the crypto-currency market is. The
Financial Conduct Authority in the United Kingdom believes that investor
that invested in Initial Coin Offering (ICO) should be ready to lose all their
money. “ICOs are speculative investments that’s tied with high risk,” it said.
“You should be conscious of the risks involved and prepared to lose your entire
stake.” (Reference 3) The two major true values of crypto-currency are to hide
assets from governments or to buy drugs or conduct other illegal trading
activities over Internet. Moreover, Goldman Sachs’ CEO Lloyd Blankfein said:
“Something that moves 20% overnight does not feel like a currency. It is a
vehicle to perpetrate fraud.” (Reference 4) Bitcoin is the biggest gainer out
of any asset classes this year, causing skeptics to declare it a classical
speculative bubble that would burst. the volatility in bitcoin trading is high
risked. Crypto-currency’s dramatic volatility doesn’t attract to high-risk
traders, and even traditional investors. Given there would be no reasonable way
to value them with any accuracy, cryto-currency stays dangerous. Interactive
Investor was the first online trading platform to introduce Bitcoin Future for
the price of $10,000 each contract, which is basically betting against extreme
price surge that Bitcoin has been experiencing. No matter if the
crypto-currency serves the purpose for tax evasion, drug trades, gambling,
political donations or scamming, the dramatic market growth in the
crypto-currency market successfully blindsided a good amount of investors into
buying crypto-currency.

 

Mike O’Rourke, chief market strategist with
JonesTrading, pointed out that one widely hyped business to business software
company named “Commerce One went public in 1999 at $21 per share and surged to
around $1,000 by the end of that year. Commerce One then ended up filing for
bankruptcy five years later.” (Reference 5)

 

Bitcoin future performance:

Futures are a type of derivative contract in
which a buyer and a seller agree on a price for a particular monetary amount to
be delivered on a certain date in the future. Bitcoin launched the first
available crypto-currency future to debut on a major U.S. Market on December
10th 2017, CBOE launched its futures contracts and in just moments after
the launch, CBOE’s website was flooded with huge amount of orders causing the
website halt operations for some time. Contracts rise from $15,460 to $16,000
in the first hours of trading on the Chicago Board Options Exchange (CBOE) The
futures will allow investors to bet against bitcoin’s surging price, a practice
known as shorting which currently is limited. For example, with one Bitcoin
priced at $20000, CBOE’s contract will then have the notional value of $20000;
whereas the notional value of CME’s contract, comprising five Bitcoins,
will be $100,000.

 

According to coinmarketcap.com, there are
currently more than 800 cryptocurrencies, with the majority of them being
unknown to the average person, and the average investor. On the 19th December
2017, “Bitcoin’s shares had surged to a price of $575 before the SEC suspended
trading. A 10-1 split would have increased the number of total shares by a
factor of ten and lowered the price to $57.50.”(Reference 5) So the stock value
of the company would not have changed. SEC has taken actions lately to crack
down on potential frauds and scams surrounding Bitcoin and other digital
currencies, particularly with initial coin offerings (ICO)s. With an ICO, a
company could sell a digital currency or token to investors instead of stock. The
U.S. Securities and Exchange Commission (SEC) has reportedly shut down trading
in shares of The Crypto Co over concerns of price manipulation until January
3rd.

 

I
believe that the arbitrage that cryto-currencies are now experiencing is similar
to the dot-com era bubble burst, as when stocks would IPO at a low price, with very
minimal information on the factual operating business, and be purchased by
investors.  The volatile digital currency
market shows that just like during the dot-com era, there are a large number of
new crypto-currencies popping up very quickly. The prices of new coins are also
low and all their prices are below $1. A low price may have been introduced to
attract new buyers. There is very little information on the creator of new
crypto-currencies and this puts buyers of these currencies at a disadvantage.

 

Therefore
as an investment advisor for Litecoin, I believe that by introducing Litecoin
future contracts would offer the market with diversification, and the market
efficiency that the entire crypto-currency is influenced by investors’
investment and the trading activities online backed with digital cash. By
offering Litecoin future, this allows the arbitrage gap created by such market
craze to be stabilized as long as the clarity of crypto-currency trading
transactions and regulations by the central bank or government doesn’t
interfere.