Bitcoin Is Skyrocketing

The biggest story of the day, which was on most investors’ minds, was the rally in bitcoin. The fact that this was such a major story even though most people in finance don’t have a large stake in the currency shows how remarkable the rally has been. As you can see from the chart below, bitcoin has rallied from $8,000 to near $10,000 in a few days. The cryptocurrency space now has a $300 billion market cap. If you were to have an equal weight portfolio with 60% stocks and 40% bonds, where cryptocurrencies were a percentage of your equity portfolio based on their market cap, the weighting of the whole industry in a diversified portfolio would be less than 1%. It’s interesting to see how such vociferous debate is occurring on something that is a small fish in the big currency sea. The reasons for such heated debate are the following: many speculators have a large portion of their portfolio in the space, many investors have sharply divergent views on the industry (some think the cryptocurrencies will go to zero and some think they can’t go down), and crypto industry experts claim these currencies will completely replace traditional finance.

Because Bitcoin and the other cryptocurrencies like ethereum have had such a quick rally, there is an expectation that the speculation will cool off, potentially leading to a crash in the prices. This makes some wonder what the domino effects could be if a crash occurs. If all the top 100 cryptocurrencies went to zero, it would be the same as a 1.3% drop in the S&P 500. This means the industry still likely isn’t big enough to cause any aftereffects if it crashes. If it continues to rise exponentially, it can start to become big enough where domino effects will occur in the event of a crash. The fact that it is still small, might imply there is more room to run in the next few months. $300 billion is smaller than some of the bigger tech companies that saw exponential increases in their stock prices in the 1990s. The 1990s tech bubble is the best comparison to this situation as euphoria starts to reach illogical levels. Personally, I wasn’t involved in finance in the 1990s, but what most finance professionals can tell you now is that they are fielding questions about the crypto space from friends and family who aren’t in the industry. That’s a telltale sign a bubble is forming.