by Tanzeel Akhtar
Decentralized currency Bitcoin rallied last week, and on Friday, September 1, hit $5,000 per BTC, a new milestone for the volatile digital currency.
So far this year, we have seen abnormal fluctuations of BTC/USD, ranging from $1,800 to $5,000. As of this writing the BTC is trading at $4,061.7, in the wake of yesterday's ban by China of initial digital currency offerings. However, the currency appears to be heading higher.
As Bitcoin continues to attract more interest and additional investors, there are a number of things worth questioning. What's driving the price and what events should one be aware of when investing in BTC? Is BTC in bubble territory? How will regulatory changes impact cryptocurrencies?
Ted Moskovitz, a former SEC lawyer and the founder of DecentraNet, says Bitcoin will surely get much larger before the bubble, if indeed there is one, pops.
“While many view Bitcoin’s new all-time high as an indication of a bubble, this is simply not the case, and we are sure to see Bitcoin’s price rise to between $7,600-$10,000 by year’s end.” explains Moskovitz.
Forex markets see an average daily volume of over $5 trillion. If Bitcoin’s total market cap reached equivalence to one day of forex trading, explains Moskovitz, it would place the value of a single Bitcoin in the ballpark of $250,000. “If you prefer to think of Bitcoin as a commodity, then gold is a good baseline for comparison," he adds. "Right now the global gold market stands at about $6.3 trillion.”
“It is estimated that only 10 million individuals had Bitcoin accounts at the start of this year—that’s .001% of the world’s population. This shows us that Bitcoin is still in a nascent phase, and as more and more people learn about it and more and more name-brand celebrities (e.g., Ashton Kutcher, John Cena, Floyd Mayweather) tweet about it, we are going to see adoption rise.”
There are virtual issues to be aware of, such as the number of Bitcoin currently available. Matthew Gertler, senior analyst and counsel at Digital Asset Research, explains that there will only be 21 million Bitcoin available. Currently, approximately 16.5 million exist, but experts estimate that at least one million coins have been lost forever. Says Gertler:
“This and Bitcoin’s other uses, such as store of value, put downward pressure on the tradeable supply. Given the limited supply and potential growth described above, a supply and demand analysis suggests that Bitcoin’s price may not be so outlandish and may still have room to grow.”
Another advancement for Bitcoin: we are beginning to see the skeptics reconsider their positions, with some starting to come on board the cryptocurrency train. At the beginning of June, American businessman and TV personality Mark Cuban tweeted that he believed Bitcoin was in a bubble.
Just a few short weeks later however, he changed his tune, announcing that he intended to participate in at least one upcoming initial coin offering (ICO).
At this point in time, it's also crucial to be aware of the regulatory side of the situation. This past July, the U.S. Securities and Exchange Commission (SEC) began moving in on the "Wild West" world of ICOs, which has sent the blockchain world reeling. Last week the Israel Securities Authority (ISA) announced plans to form a panel to regulate Initial ICOs.
And just yesterday, China's central bank, the PBoC, declared ICOs illegal. According to Bloomberg, digital currency sales have been "deemed a threat to China's financial market stability as authorities struggle to tame financing channels that sprawl beyond the traditional banking system."
Eddy Travia, CEO of Coinsilium, a firm that finances and manages the development of early blockchain technology companies, sees the burgeoning marketplace in cryptocurrencies a bit differently. Travia believes that the plethora of cryptocurrencies and new tokens is actually opening the road to a higher Bitcoin price.
“These tokens are now sufficiently traded to play the role of shock absorbers for the cryptocurrency market. Bitcoin's price no longer needs to bear the full pressure of all events affecting the cryptocurrency markets.”
Travia explains that Bitcoin is the cryptocurrency of reference, the crypto 'gold' as it were of the token market, and its price is likely to better cope with future crypto market shocks thanks to the parallel trading of a multitude of tokens in exchanges around the world.
“In a similar way to investors selling riskier ‘high-yield’ fiat investments when concerns grow at the global macro level, so can token traders rebalance their crypto asset portfolio, from higher risk tokens to Bitcoin, perceived as less risky, in the event of negative sentiment for the crypto market. Although they may not be officially classified as such by institutions for now, cryptocurrencies have all the characteristics of a new asset class and there is still much to learn about the dynamics of this new de facto asset class.”
Will Turner, a partner in the Chicago office of law firm of Barnes and Thornburg, points out:
“A bubble, defined broadly, is an asset price that is higher than the price justified by fundamental drivers of supply and demand. Often, there is a rapid increase in price followed by a rapid decrease. In the case of Bitcoin, rapid price increase is undeniable, so the interesting question is its tie to fundamentals.”
Bitcoin supply is limited through code, but there are other impacts on supply such as reserves held by individual market actors. Demand is affected by the ability to use Bitcoin in commercial transactions, whether as currency or for record-keeping or other purposes, and the availability of alternatives such as Ethereum, credit card networks and newly-issued coins.
Other, shorter-term fundamental drivers—such as yesterday's PBoC announcement for example—can cause rapid and very sharp price reversals in Bitcoin and other cryptocurrency trading. Immediately after the PBoC's ban on ICOs was announced, Bitcoin lost around 5.5% of its value, dropping $249.30. Other prominent digital currencies including Litecoin, Ripple and Dash also traded sharply lower.
Be warned too, that questions continue to linger about the efficiency of the current Bitcoin trading markets. As Turner explains, expect BTC to fall again.
“There is unequal access to information and trading in multiple, disconnected markets. The rapid increase in the prices of multiple coins suggests that current drivers in coin trading are short-term in nature. For this reason, I expect to see Bitcoin prices continue their rise even though they have topped $5,000 and to fall below again—likely more than once. I am optimistic that over the long-term prices will continue to move higher due to fundamentals.”
This is a new and still developing market. We have yet to see how high the price of Bitcoin will go, and how deeply regulations concerning cryptocurrencies might be enacted and enforced. It's a brave new world, one that holds plenty of promise, but also requires appropriate caution and at least a modicum of trading savvy.
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