Independent market research for the future investor.

By Nathan Nowbuth

Introduction of Cryptos and Bitcoin

The rises and falls of the digital currency, bitcoin, have been well documented ever since it started in 2009. It is owned and controlled by its users using a ‘peer-to-peer’ system and it differs from traditional currencies because it is decentralised and does not have a robust regulatory infrastructure such as a central bank. Bitcoin is probably the most renowned crypocurrency ever mined and the development of Blockchain technology has enhanced their practical uses, making them more robust means of payments and store of value.  For example, bitcoin is becoming recognised as an acceptable means of payment with organisations such as Expedia, Microsoft and KFC Canada. This goes to show that the importance of cryptocurrencies shouldn’t be underestimated despite the ongoing debate whether they can actually be categorised as an ‘asset’ or ‘money’. When referring to bitcoin, it is worth considering that there are two main types: Bitcoin Cash (BCH) and Bitcoin (BTC). With Bitcoin Cash, transactions cost only micro fees (less than 1p), meaning they are much cheaper and also faster than international bank transfers. Bitcoin is used predominately as a ‘store of money’. They are usually stored in hardware wallets for security which require a secure private key to access. Another notable fact about bitcoin is that is has a finite supply. Unlike other cryptocurrencies such as Ether, bitcoin is sometimes referred to as a digital gold. Like gold, it cannot simply be created arbitrarily, and each bitcoin requires work to extract, a process known as ‘mining’ which is done via computational means. Therefore, when all the number of bitcoins has been mined, there will be a finite supply of 21 million. Currently, around 18.5 million bitcoins have been mined, implying that approximately 2.5 million are yet to be introduced in circulation. The complex process by which bitcoin mining operates (and rewards miners) means it is estimated that the final bitcoin is unlikely to be minded until 2140.

The Bitcoin Soar:

Bitcoin soared through the $50,000 level on Tuesday 16^th February for the first time in its history, peaking at a phenomenal $52,047.97; equivalent to approximately £37,570. Since the turn of the year, bitcoin increased in value by over 75% so its value surpassing the $50k level is not necessarily an ‘out of the blue’ occurrence. The price swings of bitcoin would be unheard of in any equities or commodities markets considering that only last March, it was trading at $6,000 and in 2016, each coin was worth a mere $400 but then, bitcoin is no ordinary asset. Analyst have mainly attributed the enormous rise in Bitcoin to endorsements from prominent business people such as SpaceX and Tesla’s CEO, Elon Musk. On February 8^th, Tesla released a statement saying they had shifted $1.5 billion of cash reserves into bitcoin. After allowing the markets to digest this news, it appears that it has been positively received courtesy of increased faith and confidence being placed on the top cryptocurrency’s role within the global financial system.

I believe that this story is very significant because for many years, bitcoin pessimists have cited the asset has no underlying value since it is driven solely but speculative bubbles and that it is almost impossible to forecast any future trend for medium-long term. However, observing firm and consumer confidence grow within the world of digital currencies, a sense of interconnectivity is beginning to form with the equities market and thus, this can be referred to as one of the factors driving its value.

Figure 1: From the beginning of 2021, Bitcoin has risen from ~$29,000 to $~50,000

So is it too late to invest in Bitcoin in this wave?

From a technical perspective, it is nearly impossible to decipher anything meaningful. Figure 2 below demonstrates that candlestick chart for the past five days is extremely bizarre. About 85% of the candles are nearly non-existent due to periods of complete inactivity however, we occasionally see a blue or red spike occurring before returning to a plateaued phase. When support & resistance technicals are of no help, it is risky to use means such as stochastic oscillators and swing pivots to continue digging deeper for a trend no existent pattern. Becoming a good trader requires combining the skills of studying the charts and macro but also mastering the psychology aspect and being able to resist the temptation of placing a trade for the sake of it.

Figure 2

By solely studying the macro side to bitcoin, we can get an idea of future trading insights, but I believe they are not conclusive enough to rush into a trade because they are highly opinionated and do not have huge amounts objectivity.  

The new supply of bitcoin is inherently programmed to shrink (so the remaining bitcoins are not mined too quickly) while demand continues to boom. This means there will be a case of excess demand for bitcoins, subsequently causing its price to rise further in the future. Fawad Razaqzada, an analyst with ThinkMarkets, believes some investors will take their profits at the $50,000 milestone and in doing this, this will cause the price to soar again to $55,000 as the coins become more attainable and desirable to acquire. Moreover, investment management firms will probably consider including bitcoin within their portfolio for both augmented rates of return but also a hedge against inflation. This claim can be substantialised by Morgan Stanley who have publicly said its $150 billion investment fund is looking closely at large purchases of bitcoin whilst Goldman Sachs and JP Morgan are soon to declare investments. JP Morgan’s chief executive, Jamie Dimon, called Bitcoin ‘fraudulent’ and said it would ‘fire in a second’ back in 2017, but has recently had a change of attitude mentioning that ‘very smart people’ were purchasing the cryptocurrency. Perhaps this shows an alteration in perspective of cryptos and that they are not a ‘one minute wonder’ but rather, are here to stay and influence the long-term economic transactions landscape.

However, not everyone holds the belief that bitcoin will be revolutionary in coming future. There are sceptics who feel the price boom cannot last with the chief strategies of BofA’s securities referring to the recent price surge as the ‘mother of all bubbles’. Furthermore, the ECB’s governing council member, Mr. Makhlouf, likened investment in cryptocurrency to the 17^th century Netherlands tulip craze which eventually collapsed and caused nationwide bankruptcy.

Final remarks:

So once again, (and it certainly won’t be the last time you hear this) bitcoin and cryptos alike are splitting option. As aforementioned, I would refrain from hopping onto the bitcoin bandwagon for now and perhaps wait for this wave of optimism to pass and let the price come down to a much more realistic level and then re-do both technical and fundamental analysis. But one thing is for sure, bitcoin is definitely gaining traction and is starting to turn doubters into reluctant supporters.

Jargon Buster:

• Blockchain: is a system of recording information in a way that makes it difficult or impossible to change, hack, or cheat the system. A blockchain is essentially a digital ledger of transactions that is duplicated and distributed across the entire network of computer systems on the blockchain.
• Hedge: A means of protecting oneself against areas of financial loss or market volatility.

References

1. Fenton, A., 2020. Introduction to Bitcoin and cryptocurrencies – The advantages, disadvantages and the future. [online] Available from: http://alexfenton.co.uk/introduction-to-bitcoin/#:~:text=Bitcoin%20is%20a%20digital%20currency,central%20control%20like%20traditional%20currencies.&text=Blockchain%20allows%20cryptocurrencies%20like%20Bitcoin%20to%20function%20and%20enhances%20security. [Accessed 17 Feb. 2021].
2. Hayes, A., 2021. What Happens to Bitcoin After All 21 Million Are Mined?. [online] Investopedia. Available from: https://www.investopedia.com/tech/what-happens-bitcoin-after-21-million-mined/ [Accessed 17 Feb. 2021].
3. Inman, P., 2021. Bitcoin surges through key $50,000 level in European trading. [online] the Guardian. Available from: https://www.theguardian.com/technology/2021/feb/16/bitcoin-surges-through-key-50000-level-in-european-trading [Accessed 18 Feb. 2021].
4. Meaker, M., Dodds, L., Boland, H., Dodds, L., Field, M., Morgan, S. and Woods, B., 2021. Bitcoin ATM boom fuels money laundering fears. [online] The Telegraph. Available from: https://www.telegraph.co.uk/technology/2021/02/17/bitcoin-atm-boom-fuels-money-laundering-fears/ [Accessed 18 Feb. 2021].