Bitcoin Investors Are Irrational, and This Figure Proves It
Sean Williams, The Motley Fool
Updated
Though we're just about to turn the page on 2017, we can safely say that this year belonged to cryptocurrencies. At the beginning of the year, all virtual currencies added together would have yielded a market cap of $17.7 billion. However, as recently as Dec. 21, 2017, the aggregate market cap of all cryptocurrencies hit $654 billion, representing an increase in value of almost 3,600%. This may very well be the single greatest year we've ever witnessed in terms of returns for a single asset class.
Bitcoin, the largest virtual currency in the world by market cap, can certainly take credit for a good chunk of this rally. For much of the year, it comprised well over half of the aggregate cryptocurrency market cap, and easily remains the most popular altcoin to trade among investors. It's also accepted by more merchants than any other digital currency. Having started the year at $967 per coin, bitcoin nearly touched $20,000 recently, briefly surpassing a $300 billion market cap in the process.
A physical gold bitcoin on a table.
Image source: Getty Images.
Bitcoin investors aren't rational, and this survey proves it
But I have news for you: Bitcoin investors probably aren't rational, despite their excellent year-to-date gains.
It's tough enough trying to gather a rational thesis to support bitcoin's current valuation, but a recently released survey from LendEDU, an online marketplace for student loan refinancing, shows just how out of touch with reality most bitcoin investors are. LendEDU asked 565 American adults from across the country the following question:
"In 2018, do you think Bitcoin's investment returns will exceed the returns of 2017?"
The responses (and I hope you're sitting down for this):
Yes (76.99%)
No (9.73%)
Unsure (13.27%)
Mind you, when this study was released, bitcoin had increased by more than 1,700% in value for the year. However, the survey was actually conducted between Nov. 9 and Nov. 13, when the price of bitcoin was hovering around $6,500-$7,000 per coin. It's possible that the responses may have changed with the understanding that bitcoin rose by $10,000 per coin since the survey was conducted.
Still, this suggests that fewer than 1 out of 10 people surveyed believe bitcoin will rise by less than 550%-600% in 2018, while close to 8 out of 10 people are expecting bitcoin to skyrocket at least by another 550%-600% after turning in a once-in-a-lifetime year. If this were to come to fruition, bitcoin would rocket to a $1.6 trillion market cap in 2018 and sport a per-coin price of well over $100,000.
Institutional investors trading at their desks.
Image source: Getty Images.
You shouldn't expect this parabolic rally to have legs
However, the chances of this rally persisting another year -- at least to the magnitude suggested by 77% of survey takers -- seems very unlikely. Here are a number of reasons why the wheels on this bus could be ready to fall off.
To begin with, retail investors, who are prone to investing with their emotions on their sleeves, have primarily been in control of the price movement in bitcoin and other cryptocurrencies throughout 2017. Institutional investors have mostly been keeping their distance because of the unregulated and highly volatile nature of cryptocurrency markets and exchanges. But that's changing a bit as we head into 2018.
On Dec. 10, CBOE Global Markets(NASDAQ: CBOE) became the first platform to kick off bitcoin futures trading, with CME Group (NASDAQ: CME) following a week later on Dec. 17. Nasdaq(NASDAQ: NDAQ) has plans to begin offering a futures trading platform, as well, sometime in the first or second quarter of 2018. Aside from providing a means to boost revenue for CBOE, CME, and Nasdaq, futures trading offers the first real opportunity for institutional investors to bet against bitcoin. Prior to this, buying and selling was the only viable option, with no real way to bet against a cryptocurrency and make money if it fell.
Furthermore, both the New York Stock Exchange and CBOE Global Markets have filed to list bitcoin ETFs, or exchange-traded funds. These ETFs would track the movement in bitcoin futures contracts rather than bitcoin itself, but it would presumably make it worlds easier for institutional investors and skeptics to place their bets against bitcoin. Long story short, skeptics are going to have a much easier path to exert their influence on bitcoin next year, which I suspect could stop this rally in its tracks.
A physical gold bitcoin in a mouse trap.
Image source: Getty Images.
There's also the potential that government regulation could be an impediment to bitcoin in 2018. Though it received a boost from Japan, which accepted the virtual coin as legal tender this year, cryptocurrencies and bitcoin could just as easily be banned by other countries. In October, Russian President Vladimir Putin condemned bitcoin, and suggested a ban on all cryptocurrencies. This would be a blow to bitcoin, which already saw domestic cryptocurrency exchanges shut down in China.
We should also take into account just how bad Wall Street and retail investors are at correctly predicting the uptake of new technology. The emergence of cryptocurrencies is all about replacing cash purchases with virtual currencies and the rise of blockchain technology, which is the digital and decentralized ledger that underlies most cryptocurrencies and records all transactions.
Retail investors have priced bitcoin and other cryptos as if enterprises will open their arms and implement blockchain immediately. Yet blockchain has been around for years, and only now is getting tested in small-scale and pilot projects. While this could be a game-changing technology, it's also going to take time to be integrated into the financial-services and technology industries. That could prove to be a major letdown for investors in 2018.
History has shown that emotions can only carry an asset so far, and 2018 could prove to be a reality check for bitcoin and cryptocurrency investors.
Sean Williams has no position in any of the stocks mentioned. The Motley Fool recommends Cboe Global Markets, CME Group, and Nasdaq. The Motley Fool has a disclosure policy.
