Historically, the stock market has been the greatest creator of long-term wealth, and it certainly hasn't disappointed in 2017. Each of the three major U.S. indexes have logged dozens of fresh all-time record highs, with the broad-based S&P 500 up almost 300% from where it troughed during the Great Recession.
Yet in spite of these impressive gains, it's cryptocurrencies like bitcoin that have stolen the show. On Dec. 5, bitcoin touched yet another all-time high, inching ever closer to $12,000 per coin. Since the year began, bitcoin has rallied more than 1,100%, which has coerced investors to pile into the world's most popular cryptocurrency. Despite skepticism, it's shown little signs of slowing.
Bitcoin's 1,100% gain in 2017, explained
Underlying bitcoin's romp higher appears to be a confluence of three factors. First, there's a lot of excitement surrounding blockchain, which is the underlying infrastructure of virtual currencies like bitcoin. Blockchain is the digital and decentralized ledger that records all transactions without the need for a financial intermediary like a bank. These open-source networks are also considered to be especially secure, cheaper than current payment service networks, and offer the possibility of quicker transaction settlement times.
Second, investors are encouraged by bitcoin's acceptance by merchants. A number of brand-name businesses began accepting bitcoin back in 2014, and its popularity with merchants has only grown as its value has increased almost exponentially. Online retailer Overstock.com (BYON 3.12%) has opened its arms to a half-dozen cryptocurrencies, including bitcoin, and it's been holding onto a portion of its virtual currencies received as payment because it believes these cryptocurrencies could rise even more (thusly adding to Overstock's bottom line via investment gains).
We're also probably witnessing what the financial networks refer to "FOMO," or the fear of missing out. As bitcoin has pushed higher, no investor wants to be the one left out while their friends and family "get rich." In other words, emotions have played a big role in pushing the world's most popular digital currency through the roof.
There are now two sides to each coin
But as the old saying goes: "What goes up, must come down."
It's no secret that multiple Wall Street moguls have questioned the validity of bitcoin. Long-term investing success story Warren Buffett has equated bitcoin to nothing more than putting a dollar value on a check, while JPMorgan Chase CEO Jamie Dimon has called the most popular digital currency a "fraud." Yet it's not words that have the potential to bring bitcoin down from its lofty heights. Instead, it could be the launch of bitcoin futures, which is set to occur on Dec. 10.
It was announced this past week that the CBOE Global Markets (CBOE 2.95%) would launch bitcoin futures contracts on Sunday, Dec. 10 (futures trading opens at 5 p.m. EST on Sunday). This actually beats the CME Group (CME 1.40%) to market with bitcoin futures by about a week. But it's Dec. 11 that could represent a sort of virtual currency doomsday for bitcoin.
With institutional investors heading back to the office on Monday and ready to put their investment dollars to work, we're going to see, for the first time ever, a "fair" market in bitcoin. Up to this point, investors have only been able to buy or sell bitcoin on decentralized exchanges. With futures contracts, institutional investors that had primarily been kept on the sidelines will now have the option of betting against bitcoin and making money. This hasn't been an option up to this point considering that retail investors have been in charge. The ability for big investment firms to bet against bitcoin beginning on Dec. 11, when they head back to work, could be the tipping point that crushes this exponential move.
Similarly, because bitcoin is an asset with no precedence, futures trading platforms like the CBOE and CME Group have no idea what to set margin requirements at. It's quite possible that bitcoin's volatility could lead to even more unsettled trading and market destabilization as a result of margin calls tied to futures contracts.
Mark my words: Dec. 11 has all the makings of a possible crash for bitcoin.