Bitcoin has scaled new heights yet again to reach a record high of $7,425, a return of 650 per cent since the beginning of the year, as the pre-fork price charge gathers momentum. A price target of $10,000 by Christmas doesn't sound quite as outlandish as it did back in January when bitcoin was trading at just $1,000!
The impetus for the latest climb came from the CME announcement earlier in the week that it intends to start trading bitcoin futures.
Pavel Mateev, chief executive of Wirex, a UK-based digital wallet and crypto currency debit card provider, commenting on the move by the Chicago exchange, said: ‘CME Group's recent decision to provide bitcoin-based derivatives contracts and Japan's recognition of bitcoin as an official payment form, indicates mainstream financial policy is bringing bitcoin in from the cold.’
He put bitcoin powering through the $7,000 mark down to ‘an awakening amongst financial institutions that bitcoin is transforming how the world thinks about money’, but although many financial firms are having to grapple with what the bitcoin phenomenon represents, it by no means implies they are necessarily looking upon bitcoin favorably.
Far from it, when one considers the remarks of Credit Suisse chief executive Tidjane Thiam, who this week described the digital currency's stubborn ability to keep attracting investor funds as the ‘very definition of a bubble’ because ‘the only reason to buy or sell bitcoin is to make money’. He predicted the speculative frenzy would not have a ‘happy end’.
And there was further negativity from US broker Themis Trading, which questioned CME's motives, scolding them for caving in to demands from ‘large, high frequency clients’ looking to make a quick buck.
Themis rightly points to the dangers inherent in the unregulated exchanges bitcoin and other cryptocurrencies trade. ‘We think they [CME] know that spoofing and layering could be running rampant on these exchanges’ stated the broker in a note entitled This Is Why Bitcoin Futures Should Not Be Approved. Spoofing and layering is the illegal practice (in equity markets) of making orders to buy that are not followed through, thereby manipulating the price by creating a false impression of buying pressure.
Anyone frequenting the Telegram chat rooms offering trading price signals might have come across phrases such ‘we are doing a pump and dump on xxxx exchange.
Themis concludes ‘we think it would be irresponsible and dangerous for the CFTC [Commodity Futures Trading Commission] to approve the bitcoin futures proposals. These products remind us of the collateralized debt obligations (CDO's) which were peddled during the financial crisis.’
As the crypto sector grows and the prospect of at least a minority of financial institutions dipping their toes in the water, regulation and surveillance of exchanges is surely not too far away in the US and elsewhere.
But others on Wall Street are more positive on bitcoin, or at least open to being persuaded. In this camp is the Goldman Sachs chief executive Lloyd Blankfein. ‘I know that once upon a time, a coin was worth $5 if it had $5 worth of gold in it,’ he told Bloomberg. ‘Now we have paper that is just backed by fiat ... maybe in the new world, something gets backed by consensus,’ he continued.
Blankfein spoke of going into the future and looking back, surmising that he wouldn't find it difficult to explain how it came to pass that crypto eclipsed fiat currency. Rumours of a Goldman Sachs trading desk in crypto proved to be false, but the investment bank is reported to be considering doing so.
While the ‘is it a bubble or is it a financial revolution’ argument rages on, a growing number of consumers seem to be deciding for themselves that the risks are worth it as they succumb to the fear of missing out (FOMO), judging by the business growth at US crypto exchange Coinbase, where 100,000 new accounts have been opened in the past 24 hours.
And it's not just bitcoin making headlines – one of its cousins, Bitcoin Cash (BCH), is motoring higher too, although that is something of an understatement. BCH is up a massive 86 per cent over the past seven days, as investors bet on the bitcoin variant's bigger block sizes will make it, theoretically, a better fit for real word use as a means of exchange. On paper that's true, but bitcoin has got a hell of a head start and the network effect that comes with that.
Mateev considers the new types of bitcoin as supportive. ‘The forks – Bitcoin Cash and Bitcoin Gold – arose because of differing opinions on how to scale bitcoin and reduce transaction times,’ he said. ‘What really matters is that Bitcoin is winning over ordinary members of the public who want a fairer, more cost effective and faster method to pay for everyday purchases.’
Leading industry news and analysis site CoinDesk ran a report this week in which some miners said they were turning to Bitcoin Cash as the 'real bitcoin'. It further underscores how the talk of the upcoming mid-November fork has brought into sharp relief the presumed transactional virtues of bitcoin cash fork.
In addition, it turns out that miners are nowhere near as committed to mining SegWit2x as was once thought. This might point to a situation that sees the B2x fork becoming a minor chain.
Having said that, it is likely that there are buyers of bitcoin who are motivated by the prospect of receiving yet another 'free' coin, this time in B2x form.
Taking a step back and reconsidering the issue of bitcoin's suitability as an actual currency in the sense of a means of exchange, it's a mute point whether the transaction issue is at all relevant. The main block to mass adoption as a means of exchange at this juncture is probably not so much the small size of the blocks and the resulting high fees, but rather the volatility of the cryptocurrency and its continued price appreciation.
This is a view echoed by German financial services giant Allianz's chief economic adviser Mohamed El-Erian. ‘A currency serves as a predictable store of value, and serves as a medium of exchange that's pretty stable in value as well - bitcoins aren't that there [sic] yet, they're still trying to find stability so it's more of a commodity than it's a currency,’ he told financial TV news channel CNBC this week.
El-Erian is consistent in his outlook for bitcoin. When the virtual currency was at $4,000 he said a fairer valuation should be half that level. His reasoning is rooted in the assumption that investors are hugely over-estimating the chances of bitcoin being adopted and used as a currency.
A suitable store of value?
At this stage he is very probably correct, but is his main valuation assumption mistaken? In addition to a unit of account, the other use case for money is store of value. El-Erian references this but says bitcoin's volatility also makes it unsuitable in that regard too. However, this flies in the face of the reality.
Agreed, volatility is not what you're looking for in a store of value, but if that volatility is within an upward trend, it makes it an appreciating store of value. At the moment, then, it could be argued that bitcoin is a pretty good store of value; so good in fact that it doesn't really make sense to give it to a merchant in exchange for goods and services because its price is rising.
The operative phrase in that sentence, however, is ‘at the moment’. What's to stop the nascent currency falling by say 85 per cent, as it did between November 2013 and January 2015, 39 per cent between 11 June and 16 July or 25 per cent during one week in September?
Such price corrections are relatively common in bitcoin's nine-year history but, to repeat, they have taken place in an upward trend when you zoom out from the historic price charts. Is it the underlying use case for bitcoin as 'self-aware' money and a digital means of exchange in a digital age, that provides the floor to counter the bubble fears?
Iqbal Gandham, UK managing director at social trading platform eToro, certainly thinks so. He says those who look at bitcoin as being in a bubble misunderstand what's going on. ‘This is all about the potential of bitcoin to become a major part of all our lives’ although he admits it still has a way to go ‘to become a mainstream payment system’.
Although he doesn't put a number on his price prediction, Gandham said: ‘Volatility in the price might make for a bumpy ride, but we expect Bitcoin to continue to climb this year.’
So it's $10k here we come? Who knows, but as bitcoin keeps making new highs and the excitement grows, it draws in more buyers. For now, some investors are happy to ride the wave and worry about how to value bitcoin later.
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