Bitcoin’s record high may also prove to be its peak

It’s fair to suggest 2017 will be remembered as a year of very strong share price performances in technology companies and significant technology-led disruption to other industries, writes David Holohan

Bitcoin’s record high may also prove to be its peak

Not since the internet bubble have technology companies been in vogue to the degree that they currently are. The Nasdaq market has increased in value by just under 30% during the first 11 months of the year with some of the most impressive gains coming from the largest companies in the index.

Apple’s performance is the most impressive, increasing by 51% and resulting in a market value increase of $300bn to now stand at $900bn. As the largest company in the world, Apple is now within touching distance of achieving a market value above $1 trillion.

While it is an almost unreachable milestone for any other company to achieve, Apple’s ability to maintain such a lofty value will clearly be a challenge and may require the company to use some of its $175bn of cash to acquire businesses that will move the focus away from consumer-focused hardware products.

2017 has also been an evolutionary year for Amazon, the internet retailing behemoth. The sheer mention of the company strikes fear in the boardroom of any US bricks and mortar retailer, given Amazon’s relentless desire to capture an increasing amount of business and consumer spending. The acquisition of Whole Foods provided Amazon with an entry into the food category through supermarkets and offered increased distribution points for the internet giant.

Following on from that transaction, there are now concerns among businesses that Amazon is going to further encroach in other areas, potentially competing with pharmacies and other medical product and device distributors, leading to significant share price declines of companies in these industries.

These fears appear overdone, as Amazon, despite its large size, would be unable to dominate these new markets that it is rumoured to be entering. While the company has a market value of $550bn, GAAP net income for 2017 is forecast at $2bn, showing the significant growth that will be required in future years to justify its current market value.

Perhaps the most extraordinary development in 2017 was the movement in the price of Bitcoin. The cryptocurrency has increased in value by just over 750% during the year and by many more multiples of that over the past five years — creating a bubble of enormous proportions, second only to the tulip mania of the 17th century.

For something with no intrinsic value, the overall value has increased to over $137bn, which is a shocking feature of any capitalistic system to allow something to get so big that it dwarfs the market value of several of the largest banks in the world, yet adds very little to the utility of a consumer beyond the frenetic pace of the recent price appreciation for holders of Bitcoin.

Unsurprisingly, there has been an increasing chorus of senior banking executives that have collectively described Bitcoin as a ‘fraud’, ‘the very definition of a bubble’, ‘stupid’ or even a ‘great product for crooks’.

The cryptocurrency craze has supported increased demand from the technology sector that has benefited from Bitcoin, namely semiconductor manufacturers. For something that is as opaque as Bitcoin is; it is still unknown who the founder is, or indeed how many bitcoins that individual holds, spread across many wallets. The success of Bitcoin has also spurred the creation of other cryptocurrencies in what can accurately be described as a speculative frenzy.

While 2017 US stock market returns have largely been dominated by the strong performances of technology companies, the most striking development has been the pace of growth among cryptocurrencies.

Bitcoin should stoke memories of the technology bubble of the late 1990s. 2017 has been Bitcoin’s year but this may be as good as it gets.

  • David Holohan is chief investment officer at Merrion Private

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