The rocky upwards ride of Bitcoin continues

One of the features of 2017 has been the extraordinary price volatility exhibited by Bitcoin. This has of course come at a time when many have been mulling exactly the reverse in equity markets although of course the current rhetoric over and from North Korea may well change that. For some perspective let us look back to the 29th of December.

“When I signed off before Christmas I ended with this.

The average price of Bitcoin across all exchanges is 910.16 USD

As you can take the boy out of the city but it is much harder to take the city out of the boy I had noted that it had been further on the move this week and now I note this.

Bid: $972.27 Ask: $972.28

So there has been a push higher and of course we are reminded of two things. The first is simply a factor of the way that we count in base ten meaning that the threshold of US $1000 is on the near horizon and the second is the Bitcoin surge of a bit more than a couple of years ago.”

Back then I pointed out two things. Firstly the chart pattern was of a “bowl” formation so that the price would need to keep rushing higher or it would end up like one of those cartoon characters who run over the edge of a cliff and briefly levitate before the inevitable happens. The next was that it was approaching the price of gold in individual units although later we looked at the fact that as an aggregate it was a long way away as there is much more gold.

What was driving things?

There were various influences. One generic was fear of what plans central banks have for fiat countries in an era of low and indeed negative interest-rates. Partly linked with this was the specific issue of demonetisation in India where some bank notes were withdrawn. Added to this was the continuing demand from wealthy Chinese to move some of their money abroad and the efforts of the authorities to block this so at times Bitcoin gets used.

The surge

Here is Fortune to bring us up to date.

Bitcoin was worth less than $590 a year ago. Then early Tuesday, the cryptocurrency surged to yet another all-time high above $3,500, as investors likely pulled their funds from the new Bitcoin spinoff, Bitcoin Cash or “Bcash,” to invest it in Bitcoin.

Bitcoin pulled back slightly by mid-day, trading at $3,430.

CNBC returned to the comparison with the price of gold although to be fair they did offer some perspective.

That’s nearly three times the price of gold, which settled at $1,262.60 an ounce, up nearly 10 percent for 2017…….That said, the gold market is worth trillions while bitcoin’s market capitalization is only about $57 billion…..Lee pointed out that the overall size of the gold market at about $7.5 trillion dwarfs that of bitcoin.

It didn’t take long from approaching the price of gold to nearly triple it did it? Bloomberg has decided to give us a comparison which will upset central bankers everywhere.

It has increased more than threefold this year, compared with a doubling in the value of Vertex Pharmaceuticals, the best performer in the S&P 500 Index.

At least they didn’t point out that it has gone up (much) more than house prices as there is only so much a central banker can take in one go! Still they were not finished with comparisons.

Here’s some other stuff you could buy for the price of one bitcoin, including but not limited to 100 22-pound boxes of Hass avocados.

 Actually that don’t impress me much to coin a phrase as a PC user who is not especially keen on living solely on avocados and facing the consequences of setting up a stall to sell them all. But we get the idea.

Splitting the atom

The cryptocurrencies have a problem around growth and change and here is the FT Alphaville view on the fork at the opening of this month.

In the next 24 hours, the trust in the bitcoin system is going to be even more severely tested than usual. The community of miners, nodes and developers is initiating a so-called hard fork which hopes to expand the network’s processing capacity, allowing it to scale more effectively. In the process bitcoin will be split in half, and two new systems will emerge.

The hope is that faith will be channelled into the newly evolved, expanded and improved chain, while the old chain will be abandoned. But anyone and everyone who has a bitcoin will via the process suddenly be endowed with two assets instead of one, with a free option to support one and render the other useless. If the effective split makes people feel twice as enriched, it’s worth asking, why they shouldn’t feel inclined to keep hold of both of them? And that too will be an option.

It would appear that investors have sold the new Bitcoin cash to buy more of the existing Bitcoin. It would be amusing if they are rejecting change wouldn’t it? On a more serious note is this how money will be created in the future? We only have a very short time frame to consider but as we stand there has been both money and wealth creation here. Perhaps the central banks are in charge after all……

The only way is up baby

Business Insider seems rather keen.

Arthur Hayes, CEO of BitMEX, a bitcoin derivative exchange, thinks SegWit marks an important milestone for bitcoin’s future.

“At long last, the solution touted to solve bitcoin’s scaling problems, Segwit, is activated,” Hayes said.

“With Segwit implemented, I believe $5,000 Bitcoin is within striking distance,” he concluded.

Comment

Let us look at the functions of money and start with a unit of account. Many people will know of Bitcoin but how many will account in it? Not much I would suggest. The price surge will mean that so far it has performed really rather well as a store of value and indeed quite an accumulator of it but we also need to note that along the way there have been sharp drops. There has been progress in it being a medium of exchange as more places accept it but it is still a very long way away from anything like universal acceptance.

However in continues to survive and in more than a few ways thrive. Fears of central banks blocking bank accounts continue to feed its growth. Frankly the rumours that Euro area bank deposits could be frozen in a banking collapse would have been cunning if started by a Bitcoin fan. There are loads of risks just like there are in any new venture but also care is needed as this from Gadfly of Bloomberg indicates.

There are also fears that big traders are having an undue influence on the price of Bitcoin, with one blogger flagging the actions of “Spoofy” — a nickname for traders who apparently place million-dollar orders without actually executing them. Bitcoin is essentially unregulated, so risks are abundant.

I love the idea that regulation has pretty much fixed risk, what could go wrong? But even more importantly many ordinary or dare I say it regulated markets are being spoofed these days and if the reports that reach me are any guide the regulators seem to have both a tin ear and a blind eye. Along that road we may well find a reality where for some Bitcoin looks rather like a safe haven although these days we need to add the caveat whatever that is?

Also finance regularly provides us with curiousities. Today’s comes from the land of the rising sun as we note that it is clearly in the firing line from North Korea and yet the Yen has strengthened through 110 versus the US Dollar.

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10 thoughts on “The rocky upwards ride of Bitcoin continues

  1. I can’t but help think one day some computer hackers will hack these crypto currencies and thatll be the end of them.

    Would it not be in govt/ central banks interest to do as much if they started looking like a threat.

    • Hi Arthur

      I have wondered that myself from time to time! The catch would be that the central banks would need to employ people to do it and that would run the risk of exposure. Perhaps GCHQ or the NSA might have people with the ability to both do it and keep in the shadows.

  2. Great blog and a really interesting topic. I cannot help thinking that Bitcoin (and other e-currencies) are a function of two things:
    1. The differential between reality and non-reality are being blurred in every sphere, from “reality” TV shows (which are obviously not real) to the ability to use electronics to fake photos, to the incredible hours spent on phones/computers, to tabloid newspapers reporting on TV shows as though this is news etc; and
    2. The existing system, through QE and through bank lending multipliers, is apparently creating money out of thin air, so why not do it electronically?
    Although I am old enough to use cash a lot, my children never seem to carry any cash with them, so money to them is an electronic number in any case.
    We will know that Bitcoin has really arrived, however, when we measure the value of the dollar in bitcoins, not the other way round as at present.

    • Hi James and thank you

      The issue of defining money and to some extent cash is something which has changed so much. I used to wonder in the past if credit card limits counted as a sort of potential money supply and now with the number of places which take cards for “ordinary” spending that is so. I was out Friday night with friends and now it is normal to pay for drinks with a card not just food for example. Not so easy to put that in the money supply data though.

      For all the claims of the demise of the “King Dollar” you are right to point out that it remains the numero uno of yardsticks.

  3. BTW, completely off topic, but did you hear Radio 4 at 6 am this morning, some expert actually referred to the problems being caused by QE and the fact that no one, as yet, had any idea how QE would be brought to an end. Finally, some mainstream coverage!

  4. bitcoin is like gold – you need to exchange it for real world currencies

    when I can pay my taxes in it then it will have come of age ……

    Forbin

    • Hi Forbin

      That is a fair point. I think Japan may be the only place if this from CNBC in April is any guide.

      “Earlier this month, Japan began accepting bitcoin as legal currency with major retailers backing the new law. Consumer electronics retailing giant Bic Camera began accepting bitcoin last week”

  5. Nearly bought bitcoin at $400 however machine code has no intrinsic value unlike gold which is a commodity that is hard to come by.
    I cannot believe that it has reached its current value but I could say the same about Facebook or property I was totally wrong on both of those.
    Gold is languishing because he price is set and heavily manipulated in the criminal futures markets where huge amounts of non existent paper gold is regularly dumped to control the price.
    Some say bitcoin will go to $1M they may be right it is going up because the price is rising like any bubble,it could be a kite for cashless society by central banks just like contactless.
    If internet goes down or is hacked what then ?Tulips in the 21st century me thinks

    • Hi Private Fraser

      You may well be right. However if the internet should go down it will take quite a few more conventional payment systems with it. We would see a dash for cash and maybe the return of the cheque.

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