Bitcoin Frenzy Sees Price Top $16000 Before Losing 20% In Roller Coaster



ETX Capital, a firm that offers trading in Bitcoin. “The price action is exceptional and something that is without any parallels. It is a bubble for sure in its dynamic, we just do not know when or how it will collapse.”

Lee W. Mcknight, Associate Professor in the iSchool (The School of Information Studies), Syracuse University, said earlier this week: “If Bitcoin is a market bubble, its price rising to over $10,000 only suggests that there are more assets available for speculation in the market than previously forecast. Since Bitcoin amounts to less than a $200 billion market, my assessment is that there is room, and lots of idle cash and virtual market frenzy, to fuel its continued rise.”

He added: “Many of those investing/speculating in the Bitcoin market are calling it digital gold – a commodity – that is as a way to store value. Since tax authorities generally agree that Bitcoin is a commodity, this may make sense. Since just as it is OK that physical gold is bulky and not that handy to trade, it is not a problem that Bitcoin is bad at its main original mission.”

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Bitcoin tokens sit next to a collection of U.S. one dollar bills in this arranged photograph. The largest cryptocurrency by market value soared again this week hitting a new record high of over $16,000 before losing around 20% by the end of the week. (Photographer: Chris Ratcliffe/Bloomberg).

Bitcoin Perceptions

Bitcoin has certainly profited from a perception that it is scarce. However, while there may be 21 million Bitcoins, its smallest unit is a Satoshi – equivalent to 0.00000001 of Bitcoin. So, this means every Bitcoin is divisible to the 8th decimal place and can be broken down into 100 million units.

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And, while much has been said about the total supply of Bitcoin as a fixed amount, “hard forks" in the Bitcoin blockchain have changed the landscape.  It is argued that new cryptocurrencies such as Bitcoin Cash or Bitcoin Gold have effectively increased the total supply of the Bitcoin “brand” due their association.

Steve Gordon, Professor of Information Technology Management, Babson College, a private business school in Wellesley, Massachusetts, commenting said: “I believe in the future of cryptocurrencies, although not necessarily of Bitcoin. Bitcoin’s transaction rate limits and latency issues make it much less like a credit card and more like a check.  It can be used for transactions, and there are some reasonable use cases as such, especially for international transactions.”

The Professor, who would “not be surprised” to see some countries in future doing away with paper currency in favor of cryptocurrency, added: “I expect its [Bitcoin’s] value lies mostly for large-value transactions.  There is some possibility that side-chain capabilities will make smaller and even micro transaction attractive, but the jury is still out on that.”

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Highlighting a couple of factors that could do with further expanding upon, Wilson at ETX Capital in London pointed to a “regulatory crunch” coming down the line. “This is to be expected and the recent price action may in part be explained not just by the advent of regulated futures trading, but also bulls ramping up prices while the going is good,” he suggested.

For example, in the U.S., Senate Bill 1241, (Combating Money Laundering, Terrorist Financing, and Counterfeiting Act of 2017), would require anyone dealing in Bitcoin – whether issuing, redeeming or cashing it in – to be classed as a financial institution.

Bloomberg

A chart of Bitcoin’s one-day price movement as of December 7 2017. (Source: Bloomberg).

Once you start hammering not just the Bitcoin exchanges with Anti-Money Laundering (AML), Know Your Client (KYC) and all the other regulatory swathe, but also every investor and user, the “appeal of cryptos as an off-grid currency is destroyed”, the City analyst asserted.

In this sense, he suggested “mainstreaming” Bitcoin makes it less valuable – not more. You are also not going to regulate cryptocurrencies out of existence, nor would governments and central banks wish to stop blockchain technology.

But the Scot ventured that they can regulate crytpocurrencies to a point where they “destroy the value in any one version” by taking control of it for themselves.

And, when talking about versions, there were another 1,172 as of early November 2017, which are digitally similar to Bitcoin. But as Professor McKnight at Syracuse University pointed out are “in most cases technically improved and hence more likely to be practically used for trusted transaction processing.”

So in sum, as he posited, investors in Bitcoin at $10,000 and above are “either wise to get in at an early stage or the last fools betting on the wrong currency.” And, while Bitcoin, originally conceived as an anonymous, cryptographically secure means to lower online transaction costs, McKnight added that “Bitcoin is actually bad at that. American Express Mastercard, Paypal, VISA and Venmo are all way better.”

“If you say that cryptos are currency, then mining is akin to printing money, which is only a game for central banks and governments. There is clearly a seigniorage problem for governments that they will not allow to tolerate forever; governments do not just hand over the creation of new money to outsiders.” (Note: Seigniorage is the difference between the value of money and the cost to produce it).

Asset Or Currency?

Whether it is an asset rather than a currency, here too the mainstream effect is important and we can look at the development of regulated futures contracts, as well as possible ETFs to follow on the back.

“The thinking is that mainstreaming Bitcoin makes it more valuable, but there is a good reason to think the opposite is the case. It has pretty much zero appeal as an asset unless you think someone else – the greater fool – will pay more for it,” said Wilson.

He added: “At least with regulated futures the market ought to behave more normally than it has done – notwithstanding some pretty major spasms in the market that are likely this coming Sunday night and Monday morning as the contracts launch. And, this would be net bearish for Bitcoin overall as it will allow proper shorting and hedging strategies.”

Shorting Bitcoin

At present the only way to short is to sell your Bitcoin and exit the market, a bias that favours bulls. And, the ability to go short creates a new dynamic in the market and may result in a significant shock to prices.

The problem, Wilson argued, is anyone shorting against this headwind of rapidly rising prices needs to be able to sweat out huge potential upside. “As plenty before have noted, Bitcoin might keep rising longer than shorts can stay solvent,” the City based analyst said. And, don’t discount more volatility.

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Is Bitcoin mania peaking or is it just getting started? That’s a question that has popped up at several capital market events in The City this week I attended. The jury seemed divided from discussions I had on the matter. And, when reading a double-page spread in the ‘London Evening Standard’ last night explaining the Bitcoin and altcoin revolution, “billion dollar babies” and the Bit pack, one starts wondering if it will blow up.

Maybe the mania is peaking, maybe it is just getting going. Either way Bitcoin was still being bid up last night to the gunnels and hit a fresh record high at $16,000 last night – before a correction today. This was ahead of the launch of futures trading from this Sunday night. Many will no doubt be salivating about the prospect and recent price moves.

XBT spiked to $16,315 at one stage before slipping back below the $16,000 handle (see chart). It had reached a new peak of $16,660 in overnight trading. The ‘Big Daddy’ of cryptocurrencies saw frenzied speculation this week with almost 20% wiped off its value at one point this Friday. However, it was still being exchanged at over $15,000 at the end of this week. Roller coaster or what.

The first Bitcoin future trades commence this Sunday on the CBOE Futures Exchange, followed by the CME Group a week later. And, it has been reported that Nasdaq aims to get in on the act in 2018.

“We are running out of new things to say about this,” said Neil Wilson, senior market analyst at City brokerage ETX Capital, a firm that offers trading in Bitcoin. “The price action is exceptional and something that is without any parallels. It is a bubble for sure in its dynamic, we just do not know when or how it will collapse.”

Lee W. Mcknight, Associate Professor in the iSchool (The School of Information Studies), Syracuse University, said earlier this week: “If Bitcoin is a market bubble, its price rising to over $10,000 only suggests that there are more assets available for speculation in the market than previously forecast. Since Bitcoin amounts to less than a $200 billion market, my assessment is that there is room, and lots of idle cash and virtual market frenzy, to fuel its continued rise.”

He added: “Many of those investing/speculating in the Bitcoin market are calling it digital gold – a commodity – that is as a way to store value. Since tax authorities generally agree that Bitcoin is a commodity, this may make sense. Since just as it is OK that physical gold is bulky and not that handy to trade, it is not a problem that Bitcoin is bad at its main original mission.”

Bitcoin tokens sit next to a collection of U.S. one dollar bills in this arranged photograph. The largest cryptocurrency by market value soared again this week hitting a new record high of over $16,000 before losing around 20% by the end of the week. (Photographer: Chris Ratcliffe/Bloomberg).

Bitcoin Perceptions

Bitcoin has certainly profited from a perception that it is scarce. However, while there may be 21 million Bitcoins, its smallest unit is a Satoshi – equivalent to 0.00000001 of Bitcoin. So, this means every Bitcoin is divisible to the 8th decimal place and can be broken down into 100 million units.

And, while much has been said about the total supply of Bitcoin as a fixed amount, “hard forks” in the Bitcoin blockchain have changed the landscape.  It is argued that new cryptocurrencies such as Bitcoin Cash or Bitcoin Gold have effectively increased the total supply of the Bitcoin “brand” due their association.

Steve Gordon, Professor of Information Technology Management, Babson College, a private business school in Wellesley, Massachusetts, commenting said: “I believe in the future of cryptocurrencies, although not necessarily of Bitcoin. Bitcoin’s transaction rate limits and latency issues make it much less like a credit card and more like a check.  It can be used for transactions, and there are some reasonable use cases as such, especially for international transactions.”

The Professor, who would “not be surprised” to see some countries in future doing away with paper currency in favor of cryptocurrency, added: “I expect its [Bitcoin’s] value lies mostly for large-value transactions.  There is some possibility that side-chain capabilities will make smaller and even micro transaction attractive, but the jury is still out on that.”

Highlighting a couple of factors that could do with further expanding upon, Wilson at ETX Capital in London pointed to a “regulatory crunch” coming down the line. “This is to be expected and the recent price action may in part be explained not just by the advent of regulated futures trading, but also bulls ramping up prices while the going is good,” he suggested.

For example, in the U.S., Senate Bill 1241, (Combating Money Laundering, Terrorist Financing, and Counterfeiting Act of 2017), would require anyone dealing in Bitcoin – whether issuing, redeeming or cashing it in – to be classed as a financial institution.

Bloomberg

A chart of Bitcoin’s one-day price movement as of December 7 2017. (Source: Bloomberg).

Once you start hammering not just the Bitcoin exchanges with Anti-Money Laundering (AML), Know Your Client (KYC) and all the other regulatory swathe, but also every investor and user, the “appeal of cryptos as an off-grid currency is destroyed”, the City analyst asserted.

In this sense, he suggested “mainstreaming” Bitcoin makes it less valuable – not more. You are also not going to regulate cryptocurrencies out of existence, nor would governments and central banks wish to stop blockchain technology.

But the Scot ventured that they can regulate crytpocurrencies to a point where they “destroy the value in any one version” by taking control of it for themselves.

And, when talking about versions, there were another 1,172 as of early November 2017, which are digitally similar to Bitcoin. But as Professor McKnight at Syracuse University pointed out are “in most cases technically improved and hence more likely to be practically used for trusted transaction processing.”

So in sum, as he posited, investors in Bitcoin at $10,000 and above are “either wise to get in at an early stage or the last fools betting on the wrong currency.” And, while Bitcoin, originally conceived as an anonymous, cryptographically secure means to lower online transaction costs, McKnight added that “Bitcoin is actually bad at that. American Express Mastercard, Paypal, VISA and Venmo are all way better.”

“If you say that cryptos are currency, then mining is akin to printing money, which is only a game for central banks and governments. There is clearly a seigniorage problem for governments that they will not allow to tolerate forever; governments do not just hand over the creation of new money to outsiders.” (Note: Seigniorage is the difference between the value of money and the cost to produce it).

Asset Or Currency?

Whether it is an asset rather than a currency, here too the mainstream effect is important and we can look at the development of regulated futures contracts, as well as possible ETFs to follow on the back.

“The thinking is that mainstreaming Bitcoin makes it more valuable, but there is a good reason to think the opposite is the case. It has pretty much zero appeal as an asset unless you think someone else – the greater fool – will pay more for it,” said Wilson.

He added: “At least with regulated futures the market ought to behave more normally than it has done – notwithstanding some pretty major spasms in the market that are likely this coming Sunday night and Monday morning as the contracts launch. And, this would be net bearish for Bitcoin overall as it will allow proper shorting and hedging strategies.”

Shorting Bitcoin

At present the only way to short is to sell your Bitcoin and exit the market, a bias that favours bulls. And, the ability to go short creates a new dynamic in the market and may result in a significant shock to prices.

The problem, Wilson argued, is anyone shorting against this headwind of rapidly rising prices needs to be able to sweat out huge potential upside. “As plenty before have noted, Bitcoin might keep rising longer than shorts can stay solvent,” the City based analyst said. And, don’t discount more volatility.

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