Bitcoin’s Sharp Rises and Falls

Bitcoin price fall

As usual, the roller coaster ride of Bitcoin (BTC) continues. Unlike a roller coaster the big dips aren’t nearly as exciting for those who own some bitcoin, especially if you’ve chosen to buy in the last few weeks.

Let’s take a look at some of the causes of Bitcoin’s rise and fall in value over the short term and balance this with a longer term view.

The first thing to consider is what drives the short term price of any asset?

Sidenote: When getting involved with Bitcoin, and other cryptocurrencies, the community, it’s language and members are not your traditional finance types. After all Satoshi Nakamoto’s white paper was written as a consequence to the financial crisis of 2008.

Taken from the abstract in the white paper (essentially, Bitcoin’s business plan) Bitcoin was proposed as:

“A purely peer-to-peer version of electronic cash (which) would allow online payments to be sent directly from one party to another without going through a financial institution.”

Bitcoin has grown through non traditional channels to become more mainstream. As a result some of the interesting and well informed articles written about Bitcoin use less formal language. This doesn’t stop them being useful references. But an adjustment of attitude may be required for those coming from a more formal financial background.

What impacts Bitcoin and its price on an immediate basis?

Like any other asset, Bitcoin’s value in the market place today is based on opinion rather than proven underlying economic fundamentals.

“Price has only a very minor correlation with money invested, and a major correlation with opinion.” [1]

So if that’s the case what is influencing opinion today?

Negative opinions of Bitcoin have been reinforced by a number of major global financial institutions banning the purchase of cryptocurrencies like Bitcoin through their credit cards.

The UK’s Lloyds Bank announced it was ending credit card purchases on Sunday, amid a huge cryptocurrency sell-off. It followed similar moves by JP Morgan Chase, Bank of America and Citigroup late on Friday. Their fear – that consumer protection law will leave them, rather than the customer, liable for steep losses if cryptocurrencies continue to swing lower.

However, other big British banks have since declined to follow Lloyds’ lead, saying they currently have no plans to tighten regulations on the volatile assets.” [2] [3]

Other headlines about Facebook banning advertising for Bitcoin or other cryptocurrencies have also helped reinforce current negative opinion, like this report from The Washington Post:

“The social networking giant said Tuesday that it will not display ads for financial products that “are frequently associated with misleading or deceptive promotional practices,” specifically virtual currencies and “initial coin offerings,” a fundraising tactic that new cryptocurrencies use to attract fresh investors. [4]

With so much negative media, it’s unsurprising that opinion can shift so quickly, especially as a society we seem to be more easily swayed by the shift in the wind of what’s being reported ‘right now’ and the effect of FUD (fear, uncertainty and doubt). Remember the majority of investment in Bitcoin is from the retail market, not the more sophisticated investor or institutional markets.

Add to that Regulation:

Bitcoin is a) potentially the world’s first global currency and b) doesn’t require a financial institution. As a result regulation is a challenge for a multitude of reasons, particularly as it crosses borders.

As CNN reported:

“Within 9 years since its introduction, Bitcoin has become a major store of value through rapid adoption and growth rate in major regions such as Japan, the US, South Korea, and Hong Kong. The trading volume of Bitcoin has surpassed $2 billion and has sometimes peaked to $4 billion, surpassing the trading volume of Apple, the world’s most liquid stock.” [5]

Recent reports from China, which the markets largely reacted to negatively, and other regulatory news from India and Korea have influenced short term opinion. [6] [7]

As this immature market continues to mature and face its growing pains, regulation will continue to play a part in how its long term adoption will be formed. It’s worth remembering that as considered regulation comes into play, this is a good sign for the wider adoption and legitimacy of such a revolutionary solution to a global currency.

But as J. Christopher Giancarlo, Chairman of the Commodity Futures Trading Commission said in a written statement for the Senate Banking Committee in Washington,on 6th February this year:

“We are entering a new digital era in world financial markets. As we saw with the development of the internet, we cannot put the technology genie back in the bottle. Virtual currencies mark a paradigm shift in how we think about payments, traditional financial processes, and engaging in economic activity. Ignoring these developments will not make them go away, nor is it a responsible regulatory response. The evolution of these assets, their volatility, and the interest they attract from a rising global millennial population demand serious examination.

With the proper balance of sound policy, regulatory oversight and private sector innovation, new technologies will allow American markets to evolve in responsible ways and continue to grow our economy and increase prosperity. This hearing is an important part of finding that balance.” [8]

News about the uncertainty surrounding Tether, as we shared in a previous article will also contribute to the downturn in the current value of Bitcoin.

Despite the current Tether and regulation, there is room for optimism. Bitcoin itself remains as powerful as ever. When setting up the world’s first global currency, bumps in the road are to be expected.

Recent weeks have seen prudent investment in cryptocurrencies give way to marketwise rampant speculation. This resulting washout as the price falls will sort a lot of the “wheat from the chaff” as people consider the underlying fundamentals more closely as they invest – once bitten twice shy.

If you’re looking for a more immediate picture of where Bitcoin’s price is potentially going, then keep your eyes peeled for Jon Cotton’s upcoming article.

Sources
  1. https://www.reddit.com/r/CryptoCurrency/comments/7vga1y/i_will_tell_you_exactly_what_is_going_on_here/?st=JDAVFCGV&sh=7f6886d2
  2. http://www.cityam.com/280092/challenger-bank-virgin-money-joins-lloyds-ban-bitcoin
  3. https://cointelegraph.com/news/jp-morgan-chase-bans-buying-cryptocurrency-with-credit-cards
  4. https://www.washingtonpost.com/news/the-switch/wp/2018/01/30/facebook-bans-misleading-advertisements-for-cryptocurrencies-including-bitcoin/?utm_term=.1ea81ab82880
  5. https://www.ccn.com/bitcoin-turns-9-already-evolved-global-currency/
  6. https://cointelegraph.com/news/ban-complete-china-blocks-foreign-crypto-exchanges-to-counter-financial-risks
  7. https://cointelegraph.com/news/india-bitcoin-prices-drop-as-media-misinterprets-govts-regulation-speech
  8. https://www.banking.senate.gov/public/_cache/files/27383474-9469-49fc-88cc-f72f87b3e8ae/4E99130D460703D93EE34348CD2715C5.giancarlo-testimony-2-6-18.pdf

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