Currency expert points to the one thing that could pop the Bitcoin bubble

Another day another record high for the world’s foremost cryptocurrency, Bitcoin, as it surges to US$13,000 – a gain of over 30% just this week alone.

If you are wondering what could stop this cryptocurrency juggernaut, eminent US economist and currency expert Kenneth Rogoff offers a couple of insights in an interview with the Australian Financial Review today.

He describes Bitcoin as “totally a bubble” and states that impending government regulation will be the pin that pops the bubble.

When it comes to currency innovation (if Bitcoin can be called a currency), history has shown that the private sector always leads the way and governments always come in to regulate.

I can already hear other experts banging on the table to offer a counter argument. In an interview on Bloomberg, Kinetic Capital is predicting that Bitcoin will rally to US$50,000 in 2018 and that the US Securities and Exchange Commission (SEC) will start to impose regulations in the same year before other countries follow suit.

Kinetic doesn’t seem to think that government regulations are necessarily a bad thing. There is truth in that because government regulations are actually needed for the longer-term sustainability of cryptocurrencies.

However, increased government scrutiny is likely to drive down the price of Bitcoin, not increase it. Dr Rogoff believes that will reduce the liquidity and value of Bitcoins even though he is convinced that cryptocurrencies themselves are here to stay.

The other issue is supply of new cryptocurrencies that are more efficient and usable than Bitcoin. These will likely be seen as good substitutes for Bitcoin, which will reduce the demand for Bitcoin even further.

I see government regulation as a key risk to the price of Bitcoin and I think investors can take a leaf out of the mining boom when it comes to getting exposure to digital currencies – you should invest in the guys who make the shovels.

From that perspective, investing in companies that create software and services for digital currencies is probably the safer way to play the game. The problem is that there is only a tiny handful of ASX-listed companies that are in this space and they are all micro or nanocaps.

But you can bet your bottom dollar that we will see a number of new offerings on our market that look to ride on this boom.

Don’t worry about missing the first wave of the cryptocurrency boom. There will be other waves for you to catch.

In the meantime, the experts at the Motley Fool have identified another technological wave to hit our markets in 2018. Click on the free link below to find out what this is and the stocks that are worth putting on your radar.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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