Commentary on financial markets – August 2017
Highlights:
- Tensions between the US and the DPRK
- Czech Republic: Q2 GDP grew by +4.7% yoy
Commentary:
Rising tensions between the DPRK and the United States were the main driver of stock prices in August. The tensions were sparked by a US intelligence report that North Korea possessed operational nuclear weapons. The situation was further exacerbated by a sharp verbal exchange between Kim Jong-un, who warned the US of a possible nuclear attack on a US military base on the island of Guam. U.S. President Donald Trump countered with a sharp retort that North Korea had better not threaten the United States or it would face a fiery retaliation the likes of which the world has never seen. The DPRK added further fuel to the fire by launching a missile that flew over the Japanese island of Hokkaido and landed some 1,100 km away. A nuclear test in the North Korean mountains also apparently followed shortly afterwards, as recorded by seismological facilities in Japan and China. The VIX volatility index, also known as the fear index, jumped from around 10 points to 16 points during August precisely because of tensions on the Korean peninsula.
Developed stock markets tended to lose ground because of the tensions, most notably South Korea and Japan. On the other hand, emerging markets performed strongly, with huge gains in Russian and Brazilian equities.
The Czech Republic’s gross domestic product grew by +4.7% yoy and +2.5% qoq in Q2. The performance of the Czech economy, together with low unemployment, is pushing up wages and thus consumer spending. The growing purchasing power of Czech households is gradually being reflected in rising prices of consumer goods. However, asset prices, such as real estate, are also rising. And the Czechs’ willingness to invest is also increasing, as the volume of assets in funds rose by +2.36% quarter-on-quarter to CZK 445.6 billion in Q2. The largest increase in the value of assets was recorded by real estate funds (+5.96%) and mixed funds (+5.10%), while assets are flowing out of money market funds (-6.17%). The statistics thus show that domestic investors are looking for higher appreciation opportunities due to low interest rates and are shifting their assets to riskier and potentially more profitable assets.
Investor School – bitcoin:
The Czech economy is thriving, with average and median wages rising. In addition, retail investors are abandoning conservative investment vehicles such as savings and term accounts or money market funds due to low appreciation. The willingness to take more risk is obvious and makes sense. However, there are not only investment opportunities on the market with reasonable risk, but also speculative investment opportunities that offer huge profits but also great risk. One such opportunity is cryptocurrencies and their most famous representative, bitcoin…
The price of bitcoin has already risen more than 4.5-fold in 2017, breaking the $4,500/bitcoin mark for the first time at the end of August. It is already common to see bitcoin offers on the internet, read articles about it in the press and even see billboards abroad recommending investments in this cryptocurrency. It is worth looking at the potential of this investment, but also at its risks…
The biggest asset of cryptocurrencies is their independence from central authorities. The system is designed in such a way that neither the author nor other individuals or groups can influence the currency. Since the total amount of bitcoins is pre-determined and is gradually released, there is no risk of inflation; on the contrary, deflationary pressures will increase as the end of its release into circulation approaches (2033). Another advantage is that ownership of bitcoins is anonymised and you don’t need banks to exchange or use them. The potential of bitcoin is that if it is accepted by the majority of people as a universal tender, then it can replace conventional currencies.
Against the advantages of bitcoin are its disadvantages and possible risks. The biggest dangers are that the currency will not be universally accepted. Bitcoin is not backed by anything, it is just a virtual currency. This is the current money of the individual states more or less as well, but it has one advantage – it is accepted as a universal payment by everyone, at least within the national territory. On the one hand, the state or the central supply controls the supply of currency, which can be perceived negatively, but on the other hand, the state stands behind the currency and gives a kind of guarantee that this currency will be accepted on its territory. Another disadvantage is hacker attacks on exchange servers and thus the threat to currency holders. The last major disadvantage is the potential for money laundering, which allows for anonymous currency holdings. It is certain that in the future bitcoin, or bitcoin payments, will be affected by regulation.
The technological potential of bitcoin is certainly interesting, although it is difficult for a layman who is not familiar with technology to understand and imagine its workings. Cryptocurrencies can be expected to play an increasingly important role in the future. The only question is whether or not the current price of bitcoin matches its future potential. No one has a crystal ball, so this question cannot be answered, but it is good to be aware of a few risk factors…
What is driving bitcoin price growth? It seems that it’s no longer just excitement about a new technology, nor the realization of the potential of cryptocurrencies, but pure speculation. This can be seen in the chart, where you can see the traded volumes at the bottom. While the price of bitcoin has been rising significantly, its traded volumes have dropped significantly in 2017. It seems that any player who wants to enter bitcoin has to pay an increasingly higher price, as there are very few players who are willing to sell bitcoin. This could be an indicator of a large bubble forming. Another thing to look at is the motive with which people are now investing in bitcoin. It turns out that the motive is purely speculative. The goal is to achieve extreme appreciation. This motive appears in all bitcoin sellers, who are attracted virtually only to profit. The price seems to be driven up by so-called “shaky hands”, i.e. people who speculate for a quick profit. Another disadvantage of the “shaky hands” is that they panic and sell quickly when the price drops. Just as bitcoin has risen incredibly fast, it may fall, all because of “shaky hands” and their speculative motive for buying bitcoin.
In the Netherlands in the 17th century, there was the so-called ‘tulip fever’. It was a bubble where more and more people invested in tulip bulbs brought from Turkey. Before the bubble burst, the bulbs traded at incredible prices. When the bubble burst, some speculators made huge fortunes. This was not the end of tulips in Holland, they are still grown there today. With bitcoin, the scenario could repeat itself, and yet one day bitcoin could actually take hold. Human greed and the desire to get rich without working is eternal. This is not an argument against bitcoin, but a pointing out that where great profits are made, more and more people come in believing that they too will make a “fortune”. And so a bubble forms…
Thus, for small investors, the following advice can be clearly given at the moment: avoid bitcoin! The market is overheated and is largely fueled by speculative motives, which is always dangerous because such a state can quickly turn into extreme downturns.