The Bitcoin High

15 December, 2017

Bitcoin, the crypto-currency on almost every tech savvy investor’s mind at the moment has seen a stratospheric rise in its market value. So smitten are people by Bitcoin that phrases like “The Bitcoin High” have started doing the rounds. This sudden rise in its market value has made quite a few people overnight millionaires. One can go to the extent of stating that such unprecedented growth and increase in value was last seen prior to the tech bubble of the 2000s. And well we all know what happened to that (the Tech bubble).

To try and better understand why is Bitcoin’s price so high and this astronomical increase in value, one should ideally try and understand the underlying dynamics of the Bitcoin price rise and particularly the current boom.  The most common understanding floating around in the market is that, it is the ground work being laid down by the heavy duty institutional investors for the forthcoming launch of the BTC futures market by the Chicago Board Options Exchange (CBOE) and the Chicago Mercantile Exchange Group (CME).

Both the Chicago Board Options Exchange and the Chicago Mercantile Exchange are to launch a new futures product wherein the underlying asset is to be the digital currency “Bitcoin” on December 10 and 17 respectively. The launch of this futures contract will now enable investors to go both long and short on the Bitcoin value.

The launch of these derivatives contracts is poised to make Bitcoin palatable to the big and heavy duty investors who currently are entering the market by the hordes to make a buck if and when the price of Bitcoin does fall. This launch also adds that bit of legitimacy into Bitcoin for the Wall Street honchos considering the fact digital currencies or crypto as it is popularly known as is still suspect.

The second driver of the Bitcoin success so far can be attributed to its “Store of Value”. This is a theory that has been consistently put forward by this bunch of enthusiasts or “The Crowd”. They are of the argument that since the supply of Bitcoin is limited to 21 million units in total, it has a certain amount of value to it, putting it in the same lines of precious metals being of limited quantity on the earth.

This crowd has consistently bought and held Bitcoin at various prices and refuse to sell as we more and more people joining the club thereby driving up demand even more. Hereafter it’s just the simple economics of demand and supply. In a world where people expect Bitcoin to be worth one million USD soon this sort of activity – whether rational or irrational – is quite popular.

The common thread that one would notice between the above mentioned two drivers is “Hype” and “News”. All of the price movements in cryptocurrency are primarily based on this extremely domain specific conversation that traders have amongst themselves.  

An extremely popular analogy doing the rounds states Bitcoin traders to be “jolly colonists selling stocks under a buttonwood tree”. This small but influential market is extremely prone to panics that can be caused by just a single tweet going out. What follows the initial panic is the users working together to bolster themselves with loud cries of “Hold”.

The digital currency market is at such a nascent stage that there are absolutely no dark pools, no popular high frequency algorithmic trading systems and absolutely no way to automate ones buying and selling activities. Well, without the presence of a futures contract for the cryptocurrency, there never actually existed the need for automated buying and selling.

All of the aforementioned will now be just a matter of time before they become standardized and then at that point the whole digital currency market will in a way fortify and harden itself against the market booms and busts. Until then all we can do is sit and enjoy the rises, the dips and the volatility that puts most Bitcoin dilettantes off their lunch.

For the time being it’s both the old as well as the new investors testing the limits of a decade old system, which has since its inception been untested. The recently launched CBOE Bitcoin futures and the soon to be launched CME Bitcoin futures will for certain be one of the biggest drivers of growth as well as a bust (if it does happen) over the next few months with the big institutional players making a foray into the market and get along with them the big money.

Omkar Godbole, a writer at CoinDesk (publisher of the Bitcoin Price Index – CoinDesk BPI) states that the price levels on Bitcoin should remain stable but does give the required caution saying that “a pullback to the eleven thousand USD levels cannot be completely negated”. He does, however, state that Bitcoin dipping below the now upward sloping ten day moving average of eleven thousand five hundred USD is to be a short lived event.

To further try and quell the extremely high negative speculation that Bitcoin is going to crash, Omkar also states that “a significant correction is unlikely and could be seen only on confirmation of a bearish price-RSI divergence and/or if RSI and stochastic move lower from the overbought territory”.

To answer the question “whether this situation is dangerous”, well every asset class has a certain amount of risk attached to it and similar is the case of Bitcoin. For the people who are betting extremely big on Bitcoin, the answer skews towards a “Yes”.

Going by the present day categorization of financial asset classes, Bitcoin would very certainly come under the alternate investments category thereby implying that the majority component of person’s personal investment should not be into such an asset class. The individual should diversify his/her risk into different categories of asset classes based on their risk appetite else pay dearly as per the rules of the risk to reward ratio game.

The common expectation is that Bitcoin will rise to a certain high and then fluctuate between a high and a low until it begins on the next run up. There has been a constant talk about the futures market leading to the occurrence of market manipulation thereby helping the big money players more than say the retail ones. What one must remember in such a situation is that the real value of a cryptocurrency is not driven by price but instead is driven by utility.

Just as in the year 1994 when open source software Linux and Apache appeared in the market, no one could have possibly predicted their present day value and prevalence, Bitcoin at the moment is sailing on a similar ship with high uncertainty as to what kind of prospects it holds for us in the future. Till we are able to figure that out, let all we can do is enjoy the cruise as much as we can aboard the mighty “Bitcoin Crypto Lines”.

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