Bitcoin is not about me? Don’t take it for granted

Many people will probably respond to questions about the bitcoin bubble the same way: it’s interesting, but it doesn’t affect me. After all, they have decided that they won’t invest in bitcoin, so even if there is a bitcoin bubble and it does burst, they don’t think they will be affected by it.

Maybe they should start worrying about this.

In recent years, the cryptocurrency market has continued to grow wildly and spread to the broader financial market, and this trend is likely to continue. At present, some institutional investors from the bond and stock markets have also begun to participate in Bitcoin investment. For example, Goldman Sachs Group recently stated that it is considering opening a Bitcoin trading business. In addition, more and more companies are beginning to raise funds in the form of cryptocurrency.

Analysts say that as the cryptocurrency bubble grows, the impact of a currency market crash may become greater for stock market investors, especially in the technology and financial sectors.

"When any product collapses, there's always harm," said Joe Kinahan, chief market strategist at brokerage TD Ameritrade, and technology and financial companies that rely on cryptocurrencies and those who have invested heavily in blockchain infrastructure will be the first to be hurt, said Mr. Joe Kinahan.

Some market observers have found that in less than six months, Bitcoin has risen from $1,000 to $5,000, and now has fallen back to around $4,500. In early 2016, Bitcoin was trading at less than $400, meaning that in just 18 months, the value of Bitcoin has risen more than 10 times.

Currently, the market value of the entire cryptocurrency market is about $150 billion, which has increased nearly eightfold this year. If this growth rate can continue, this global investment asset may grow into an important asset, said Lorenzo Di Mattia, fund manager of Sibilla Global Fund. According to Mr. Di Mattia, the cryptocurrency market bubble will expand to the point of bursting next year and have a huge impact on the stock market.

Another analyst said the current stage of Bitcoin's development is similar to the Internet in 1994, when it was also in a speculative bubble. "What we're seeing is that people are still trying to understand this new technology," said Matthew Gertler, senior analyst and consultant at Digital Asset Research.

Most people in the financial field believe that Bitcoin's underlying technology, blockchain, is a great invention. Even Mr. Jamie Dimon, CEO of JPMorgan Chase, who has ridiculed Bitcoin as a scam, is working on developing his own blockchain technology at his bank.

The invention of Bitcoin can be traced back to 2008, when a mysterious person named Satoshi Nakamoto published the Bitcoin white paper online. In the process of a Bitcoin holder transferring Bitcoin tokens to another person, miners use high-performance computers to calculate and verify these transactions, record these transactions on the blockchain, and mark them with unique strings. Their rewards are mainly newly generated Bitcoins.

Despite this, Bitcoin still shows no signs of replacing the US dollar and other fiat currencies.

“For Bitcoin to be successful, it needs to be active in all markets, including remittances, payments and stored value,” Mr Gertler said.

Speculation in Bitcoin has actually weakened its role as a means of transaction.

“If you agree to buy a car with bitcoin and it’s $32,000 on Saturday, but because of the volatility of bitcoin prices, on Sunday it’s $41,000, people can’t live that way,” said Mr. Kinahan of TD Ameritrade.

Nvidia and other companies are deeply affected

To be sure, a crash in cryptocurrency prices would have a big impact on companies like Nvidia, which was one of the top gainers in the S&P 500 in 2016, as was rival Advanced Micro Devices. Both chip companies cited cryptocurrency miners as a major source of demand for their graphics chips in their quarterly filings. Nvidia reportedly made nearly 6.7% of its $2.23 billion in second-quarter sales from cryptocurrency chip sales.

“Any company that gets more than 5% of its revenue from cryptocurrencies is going to see their share prices collapse very quickly if the crypto bubble collapses,” Mr Kinahan said.

Spokespeople for NVIDIA and AMD declined to comment for this article by press time.

Other companies at risk include those in the financial technology sector.

“A lot of the innovation around fintech these days is related to blockchain,” said Gil Luria, head of equity research at brokerage DA Davidson. “So if crypto assets go down in value, there could be a carryover effect for companies that are tied to blockchain innovation.”

Another problem is that some startups use cryptocurrencies as a funding mechanism. Kik, a chat app for teenagers, used this mechanism to raise nearly $100 million from retail investors overnight. Many ICOs don’t even have a product before they put shares up for crowdfunding, Mr. Gertler said.

Online retailer Overstock.com saw its stock surge after it announced it was exploring an ICO. “To some extent, if the price of cryptocurrencies falls, it could hurt them,” Mr. Luria said.

Meanwhile, Chinese regulators recently shut down local bitcoin exchanges over concerns about ICO fraud, causing bitcoin prices to plummet by 20% at one point.

And within 18 months, a new price crash could have wider consequences.

Spencer Bogart, head of research at cryptocurrency investment firm Blockchain Capital, estimates that this will happen when the first bitcoin exchange-traded fund (ETF) comes to market. The U.S. Securities and Exchange Commission (SEC) rejected the Winklevoss twins' high-profile ETF proposal earlier this year, citing the lack of regulation and transparency of bitcoin exchanges. LedgerX LLC recently received approval from the Commodity Futures Trading Commission to conduct bitcoin options and futures trading and clearing activities.

The impact of ETFs?

The advent of ETFs will lead to another wave of speculation as institutional investors, who trade only registered securities, finally gain access to the market, Mr. Bogart and others say.

“We see this every day,” said Bobby Cho of Cumberland Mining, a unit of Chicago-based proprietary trading firm DRW. “A lot of people will trade the underlying tokens directly, but a lot more will just sit on the sidelines and wait for an ETF product to come out… There’s a lot of pent-up demand for this kind of product.”

Currently, the Bitcoin market has very limited connection with stocks, bonds and commodities, and the emergence of ETFs will increase the relationship between these markets. Once the cryptocurrency market collapses, its impact may even trigger a financial crisis.

Joe Saluzzi, co-founder of agency broker Themis Trading, said that if the SEC approves an ETF based on bitcoin futures, it would sow the seeds for the next market crisis.

“You’re going to create a derivative on a derivative of an unregulated asset? To me, that’s a recipe for disaster,” Mr. Saluzzi said.