bitcoins

The Bitcoin Mania

The stories cover the bitcoin mania that has engulfed the currency in recent months. It compares Bitcoin to a new casino game in which three fundamental activities occur. Gambling, speculating, and investing are examples of these activities. Nonetheless, the paper contends that Bitcoin is not the most important factor in the market. The actual thing is comparable to bitcoins but is regulated by the European Central Bank. This is an example of a European bond. The European Central Bank’s primary responsibility is to keep the euro’s buying power stable. The European Bond, like Bitcoin, is based on time and speculation. The best time to invest money in the European bond is when the printing presses are almost closing (Mark).

The European Bond and its Rise

The European bond is an idea that came about due to the United States financial crisis. The European Central Bank quickly coined a temporarily way they would fund their budget. The idea worked perfectly. Similar to Bitcoin the European bond has experienced a meteoric rise. The two have experienced a boom in the recent past, and the bubble could be about to burst. The meteoric rise of the European bond could only be halted because two factors. One of the factors is economical while the other is political (Mark). On the economic aspect, nations will not be able to afford social programs even at the low rate of the European bond. Nations like Italy will react by printing more 10-year note until negative 10 percent rate is achieved. At such a low rate people will generate less profit from their initial investment while the pension fund will get depleted. The likely outcome of such an event is a social uprising. (Mark). Political uncertainties in nations like Italy and German could also affect the rise of the European bond. Because of political uncertainty more money is expected to move to the United States in a bid to find a safer environment. The fragility of the banking system in Spain and Italy could also spell doom for the European bond (Mark). It could fail to withstand major economic and political shocks. The collapse of the European bond is imminent and is now a matter of when and not if.

Bonds and their Importance in Capital Markets

Governments normally issue loan stocks, debentures and loan notes to investors as a way of raising money to fund various programs and projects. These are called bonds. Bonds are sometimes known as fixed income securities. The terms fixed income securities means that bonds guarantee a fixed income to an investor at specified times of the year. The interest accrued by a bond is called a coupon. The interest generated by bonds is normally predetermined and fixed. It is different from dividends accrued by equities, which vary from time to time. Investors can redeem bonds at specified times of the year. During bond valuation, the theoretical value of a particular is often determined. This involves estimating the current value of bonds, future coupons or cash flow and the value of the bond when it reaches maturity. Bonds are important elements in capital markets. It is similar to stocks, where its value determines whether it is a suitable investment channel.

Understanding Bond Valuation

For one to understand the relationship between the article and bond valuation, it is necessary to first understand the basic principles associated with bonds. To put it in simple terms a bond is like a loan. As discussed before bonds are issued by entities that need money, in most cases governments. Governments borrow money by issuing bonds. If investors are issued bonds, the government pays them interest as an appreciation for borrowing their money. It is normally issued with a specified interest, say 5 percent. The value of bonds is not fixed, but fluctuates. The yield of the bond is inversely related to its price. When the demand for bonds is high, the price rises while the yield drops. Take, for instance, a case where the government issues a bond at 100 dollars with 1 percent interest. When the demand for the bonds increases, the value of the bonds rises to about 200 dollars. However, because interests for bonds are always fixed, it remains at the original 1 percent. So, in this case, the value increases while the yield that goes to investors reduces. The beneficiary in such a scenario is the government because it is getting paid for borrowing money. The fall in yields is good for investors. As yields on bonds drop, investors expect longer loans which provide good returns. The continual rise in demand for bonds and drop in yields as it is happening with the European has elicited fear that the bond market could experience a shock in the near future. This could be occasioned by a fall in demand for government bonds, causing yields to rise. In such a case, investors will lose millions of money.

The Value of Bonds and Bond Valuation

The value of a bond is heavily associated with its future cash flows. It also relies on the present value. This is the amount of money that can generate the expected cash flow in the future. Governments can issue bonds to meet some budgetary responsibilities and run projects. Bond valuation assists investors to determine their future returns and whether buying bonds is a worthy investment option.

Work Cited

Mark, Grant. “Bitcoin and European Bonds Have a Lot in Common.” Bloomberg. (2017). Retrieved Dec. 16, 2017, from https://www.bloomberg.com/view/articles/2017-12- 13/bitcoin-and-european-bonds-have-a-lot-in-common