Future of Investing

At industry conference, a debate over the cryptocurrency ‘bubble’

  • Michael Novogratz, CEO of Galaxy Investment Partners, warns of a digital currency bubble reminiscent of the dot-com crash of the 1990s.
  • Despite the risks, others say investors can still make smart calls in a largely nascent space.
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At industry conference, a debate over the cryptocurrency ‘bubble’

As the price of bitcoin continues to soar, a prominent investor once called the “king of bitcoin” is signaling alarm.

“Whenever there’s such a huge tailwind behind an industry, there are fly by nighters making a quick buck,” said Michael Novogratz, CEO of Galaxy Investment Partners, speaking at the Consensus:Invest conference in New York on Tuesday. “I think this is going to be the biggest bubble of our lifetimes.”

Novogratz, a former hedge fund manager at Fortress Investment Group, recently started a $500 million fund to invest in cryptocurrencies. He’s been investing in bitcoin since it was priced at $90 due to the positive change the underpinning technology could have on the industry. “Bubbles happen around ideas that are actually right, that will change the world,” he said.

Despite its transformative potential, Novogratz advised investors to think carefully about bitcoin investments, a space rife with what he called “froth and fraud.” Earlier this week, Novogratz told CNBC that bitcoin could reach $40,000 by the end of 2018.

“There are lots of signs that this is December 1999 hitting a march, then we’ll have a correction back down,” he said. “We’re in the second or third inning but we have this frothiness –and you’re going to have to learn as investors either to sit through it or try to trade the excitement and depression.”

What’s driving the bitcoin bubble, Novogratz said, is a backlash against the traditional financial system that arose following 2008 financial crisis.

“At its core, it’s a reaction to a breakdown in trust that started after 2008 after the mortgage crisis — that we can’t trust some banks, governments some institutions,” he said. “Prices will go up and will crash down — it makes investing really exciting and difficult.”

Bitcoin’s value soared close to $10,000 on Tuesday —  a 1,355 percent jump compared to a year ago. Within the investment community, some actors are taking steps to curb the effects of the digital currency’s volatility. For example, for CME Group’s bitcoin futures product that it plans to launch later this year, the exchange reportedly will impose price fluctuation limits at 20 percent above or below the settlement price from the previous day. Enhanced government oversight could also play role in driving down the digital currency’s price, argued Economist Kenneth Rogoff in a recent Guardian opinion piece.

Still, others dispute the digital currency bubble analysis. Glenn Hutchins, co-founder of private equity firm Silver Lake Partners, said that while the tech stocks of the 1990s were obviously in a bubble, investing in the “very best” internet companies of the time was still a solid bet, and the same rationale can be applied to digital currency investments.

“Bitcoin could be Betamax and something else could be VHS — we don’t know who’s going be the winner,” he said. “But my personal view that if you pick the best company and ride them through the ups and downs of these valuations in the market, and stick with them for a very long time. it will be like having bought the best internet company 20 years ago.”

Chris Burniske, a partner at crypto venture fund Placeholder Capital, said volatility is part of investing and not unique to bitcoin.

“I’m pretty tired about the discussions that [bitcoin] is volatile; yes, it’s a volatile asset, but many assets that institutional and retail investors use in their portfolios are volatile — the question becomes are you getting compensated for your risk taking?”

 

 

 

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