The recent Bitcoin bubble wasn’t the first, and it might not be the last. Once in 2011 and twice in 2013, the price soared and then crashed. Then it happened again and again.
Each peak was bigger than the last. If you think there will be another, even bigger bubble somewhere down the line, then maybe any losses you took in the recent bubble may be made whole in time.
Why has Bitcoin been subject to repeated bubbles? One reason is lack of liquidity - since relatively few people owned and traded the cryptocurrency in years past, even a small buying surge could push the price up dramatically, and even a modest pullback could send it crashing.
A second reason is that Bitcoin was, at least until recently, a new asset. Speculators had no real idea how many potential cryptocurrency investors were out there. Economic theory shows that this can easily lead to an overshoot, where even rational investors temporarily push an asset’s price beyond its long-term sustainable value.
But there’s a third reason for Bitcoin’s bubbliness - it was hard to bet against it.
Basic finance theory says that if there’s no way to invest and profit from an asset's decline, the price is determined by the most optimistic buyer. If some traders think Bitcoin is overpriced, but have no way to bet on their belief, they will just sell their stake and sit out of the market. Everyone who remains will be an optimist, and they will buy Bitcoin for the high price they believe it’s worth.
This mechanism is a key part of almost every theory of financial bubbles. A famous 1978 paper by J Michael Harrison and David Kreps showed how without short-selling, differing levels of optimism and pessimism would cause even rational agents to push asset prices above fundamental values. A later model of bubbles and crashes by Dilip Abreu and Markus Brunnermeier also featured a limit on short-selling, as did another by Jose Scheinkman and Wei Xiong. In a short sale, an investor borrows an asset such as a stock or bond and sells it, hoping to buy it back for less to return to the lender and pocket the difference as a gain.
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Read more:
How the world’s governments are handling cryptocurrencies
'It was fun but I would never do it again’: UAE Bitcoin investors confess
Rookie crypto investors are ignoring the risks
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In 1997, Andrei Shleifer and Robert Vishny proposed to make this sort of constraint, which they grouped under the general heading of “limits to arbitrage,” a unifying theory of financial market failures. Research on just why and how smart, well-informed traders are unable to cancel out bubbles continues to this day.
Limits to arbitrage can help explain why Bitcoin has been so bubble-prone. Until recently, it was easy enough to take a long position, but expensive and risky to bet against the cryptocurrency. Things really changed in December, when US regulators allowed the trading of Bitcoin futures. That move came in the middle of a historic runup in the price of Bitcoin and other cryptocurrencies. But as soon as futures contracts began to trade, an interesting thing happened - futures prices suggested that Bitcoin’s growth would slow.
What happened next is historic. Bitcoin’s price crashed from a high of about $19,000 to less than $7,000 as of the writing of this article.
Was this a coincidence? Maybe. The huge surge in demand for Bitcoin both inflated the bubble and caused a demand for a futures market. But the timing of the crash, right after the introduction of futures markets, is eerie. It mirrors the result of a 2006 paper by economists Charles Noussair and Steven Tucker, who introduced a futures market into a trading experiment.
We find that when futures markets are present, bubbles do not occur in [our experimental asset] markets. The futures markets seem to reduce the speculation and the decision errors that appear to give rise to price bubbles in experimental asset markets.
A few students trading an imaginary stock in a laboratory is not the same as millions of real people trading tens of billions of dollars worth of Bitcoin. But this is a case when theory, lab experiments and practical experience align to a spooky degree. The housing bubble is another example where betting against the asset in question was extremely difficult.
This suggests that there’s a good and easy way for regulators to reduce the incidence of bubbles. Whenever a new asset is created or a bunch of new investors enters the market, allow more futures trading and other exchanges that let pessimists publicly register their pessimistic beliefs. That won’t totally prevent all bubbles - the late 1990s technology stock bubble, for instance, happened in spite of the existence of stock futures markets.
But it would certainly help. Keeping pessimists out of the market is a recipe for repeated bubbles and crashes, as overoptimistic speculators rampage unchecked. Given a level playing field, the bears can restrain the bulls.
Noah Smith is a columnist for Bloomberg View
What is a robo-adviser?
Robo-advisers use an online sign-up process to gauge an investor’s risk tolerance by feeding information such as their age, income, saving goals and investment history into an algorithm, which then assigns them an investment portfolio, ranging from more conservative to higher risk ones.
These portfolios are made up of exchange traded funds (ETFs) with exposure to indices such as US and global equities, fixed-income products like bonds, though exposure to real estate, commodity ETFs or gold is also possible.
Investing in ETFs allows robo-advisers to offer fees far lower than traditional investments, such as actively managed mutual funds bought through a bank or broker. Investors can buy ETFs directly via a brokerage, but with robo-advisers they benefit from investment portfolios matched to their risk tolerance as well as being user friendly.
Many robo-advisers charge what are called wrap fees, meaning there are no additional fees such as subscription or withdrawal fees, success fees or fees for rebalancing.
Key developments in maritime dispute
2000: Israel withdraws from Lebanon after nearly 30 years without an officially demarcated border. The UN establishes the Blue Line to act as the frontier.
2007: Lebanon and Cyprus define their respective exclusive economic zones to facilitate oil and gas exploration. Israel uses this to define its EEZ with Cyprus
2011: Lebanon disputes Israeli-proposed line and submits documents to UN showing different EEZ. Cyprus offers to mediate without much progress.
2018: Lebanon signs first offshore oil and gas licencing deal with consortium of France’s Total, Italy’s Eni and Russia’s Novatek.
2018-2019: US seeks to mediate between Israel and Lebanon to prevent clashes over oil and gas resources.
UAE currency: the story behind the money in your pockets
Nepotism is the name of the game
Salman Khan’s father, Salim Khan, is one of Bollywood’s most legendary screenwriters. Through his partnership with co-writer Javed Akhtar, Salim is credited with having paved the path for the Indian film industry’s blockbuster format in the 1970s. Something his son now rules the roost of. More importantly, the Salim-Javed duo also created the persona of the “angry young man” for Bollywood megastar Amitabh Bachchan in the 1970s, reflecting the angst of the average Indian. In choosing to be the ordinary man’s “hero” as opposed to a thespian in new Bollywood, Salman Khan remains tightly linked to his father’s oeuvre. Thanks dad.
Killing of Qassem Suleimani
Founders: Ines Mena, Claudia Ribas, Simona Agolini, Nourhan Hassan and Therese Hundt
Date started: January 2017, app launched November 2017
Based: Dubai, UAE
Sector: Private/Retail/Leisure
Number of Employees: 18 employees, including full-time and flexible workers
Funding stage and size: Seed round completed Q4 2019 - $1m raised
Funders: Oman Technology Fund, 500 Startups, Vision Ventures, Seedstars, Mindshift Capital, Delta Partners Ventures, with support from the OQAL Angel Investor Network and UAE Business Angels
'Midnights'
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COMPANY PROFILE
Name: Rain Management
Year started: 2017
Based: Bahrain
Employees: 100-120
Amount raised: $2.5m from BitMex Ventures and Blockwater. Another $6m raised from MEVP, Coinbase, Vision Ventures, CMT, Jimco and DIFC Fintech Fund
Turkish Ladies
Various artists, Sony Music Turkey
Premier League results
Saturday
Tottenham Hotspur 1 Arsenal 1
Bournemouth 0 Manchester City 1
Brighton & Hove Albion 1 Huddersfield Town 0
Burnley 1 Crystal Palace 3
Manchester United 3 Southampton 2
Wolverhampton Wanderers 2 Cardiff City 0
West Ham United 2 Newcastle United 0
Sunday
Watford 2 Leicester City 1
Fulham 1 Chelsea 2
Everton 0 Liverpool 0
Our legal consultant
Name: Hassan Mohsen Elhais
Position: legal consultant with Al Rowaad Advocates and Legal Consultants.
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Labour dispute
The insured employee may still file an ILOE claim even if a labour dispute is ongoing post termination, but the insurer may suspend or reject payment, until the courts resolve the dispute, especially if the reason for termination is contested. The outcome of the labour court proceedings can directly affect eligibility.
- Abdullah Ishnaneh, Partner, BSA Law