Bitcoin touched an all-time high this week when it broke through the $3,000 mark, only to fall back to $2,800 at the time of writing.
The extreme volatility on the bitcoin price is nothing new but the renewed intensity of that volatility will likely be here for a while as hot speculative money enters the market.
The chief executive of financial website Business Insider Henry Blodget claimed last week that bitcoin could reach $1 million.
His words were picked up by those of legendary CNBC stock-picker Jim Cramer who said it was a possibility. Speaking on his closely watched Squawk on the Street show, he said: ‘I think it could because the European banks are frantically trying to buy them so they can pay off ransomware. It’s a short-term way to be able to deal with cybersecurity. It is the way to pay off the bad guys.’ He went on: ‘when you get hit and you’re not sure how to do bitcoin, these cyber attackers have customer service desks’.
Add that to market rumours that hedge funds are eyeing buying cryptocurrencies and the recent setback in FAANG tech stocks, these factors could certainly add momentum to the price rises, and/or limit the size of corrections.
Although bitcoin is up 200 per cent this year alone, it pales when compared to the rise of Ethereum, powered by the ether coin (or token). It has seen a 3,000 per cent appreciation this year. Now commentators are talking about an inflection point where ether becomes more important in the cryptocurrency world than bitcoin.
The market capitalisation of Ethereum (coins in circulation x price) has now reached $35.8 billion (£28 billion), catching up fast on bitcoin with a market cap of $43.4 million.
Ethereum is a platform for building blockchain-based products. The huge rise in such projects gives the platform a utility beyond the currency use-case of bitcoin. Many of these projects are now launching initial coin offering (ICOs) to raise capital, which is further fuelling demand for the ether token.
Oleg Zinkevich, a spokesperson for Australian blockchain startup accelerator ICO Promo, says the projects it is behind include SONM, which he describes as building an ‘Uber or AirBnB but for computational power’ and recently successfully funded chronobank which is a blockchain platform aimed at disrupting the recruitment industry. The company’s ICO raised $5.4 million. Its next initial coin offering is for Wishfinance.com based in Singapore which is a peer-to-peer lending platform aimed at the ASEAN region.
Pavel Matveev, co-founder of the cryptocurrency debit card and mobile wallet provider Wirex, commented: ‘Ethereum has obliterated a $350 resistance level and is currently trading at $401.54 (+16.52 per cent today) right now. Demand is being driven by a recognition of the need for exactly the decentralised applications running on peer to peer networks that Ethereum is perfect for, as well as a growing appetite amongst investors to get in early on another strongly performing cryptocurrency.’
Mateev says he would not be surprised to see the currency hit ‘$600 by the end of the year’ and advises that ‘investors may want to consider hedging strategies such as switching into fiat currencies at appropriate moments’.
However, trying to time buying and selling in mature equity markets is easier said than done, except for experienced traders, let alone in the cryptocurrency Wild West, so Mateev’s suggestion should come with a large caveat emptor warning.
At this still relatively early stage, it may be better to first decide whether you see a future in the technology and then hold for the long term and ignore the price swings. Investors should only commit a fraction of the amount in their portfolio designated for alternative higher-risk investments. XBT Provider now provides two exchange traded notes that are available to UK investors: Bitcoin Tracker One and Bitcoin Tracker Euro.
Cryptocurrecny prices are particularly sensitive to news flow.
For example, activist investor Mark Cuban unleashed a twitterstorm (a succession of quickly posted consecutive tweets) on 6 June in which he said, among other things, that bitcoin was in a bubble: ‘I think it's in a bubble. I just don't know when or how much it corrects. When everyone is bragging about how easy they are making $=bubble.’
The price immediately nose-dived nearly 10 per cent before later recovering.