Bitcoin Surge Underpins Febrile Market Sentiment

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Bitcoin prices rose sharply ahead of the weekend, with market commentators saying the rally underlines the febrile state of global financial markets.

The cryptocurrency rose 17% in value after Tesla founder Elon Musk changed his Twitter biography to #Bitcoin. A subsequent message from Musk said "In retrospect, it was inevitable".

The developments require some reading between the lines, but an assumption that has some traction is that the developments relate to speculation as to whether Musk will personally invest in Bitcoin or add the cryptocurrency to Tesla's balance sheet.

The price of Bitcoin in Pound Sterling rose to a high of £27950 while the price in Euros rose to €30176 and the price in U.S. Dollars rose to $37160.

"It’s not quite apparent what the material difference between Elon Musk – admittedly the world’s richest man – having Bitcoin in his Twitter bio and not having it there really is. Does this mean he’s buying? Or does he simply think it’s a good thing. We should note that Musk’s record on Twitter with Tesla shares (‘funding secured’) is chequered. Clearly the move is being cheered by the Bitcoin bulls," questions Neil Wilson, Chief Market Analyst at Markets.com.

The moves in Bitcoin reinforces the significant influence social media is having on financial markets, with swarms of retail investors targeting obscure stocks via social media message boards.

The developments have in turn sparked a wider nervousness in markets, as money is withdrawn in anticipation of further volatility.

Wilson says Musk's comments "clearly indicates support for the crypto in some form, but I don’t think this particularly comes as a surprise."

He adds that it does indicate that markets are in a febrile mood and trading around some of the ‘hot’ securities, whether it’s Bitcoin or GameStop, is risky.

"Assets that can be moved this easily by social media, whether Twitter or Reddit, are liable for large intra-day moves and subsequently could be too hot to handle for many. It’s getting wild out there," says Wilson.

The jitters seen in global markets this week appear to be technical in nature and specific to how the market functions, as opposed to having a macroeconomic source of anxiety.

"European markets are on the back foot once more today, with the retail attack on short hedge funds raising fears of a big unwind in the market," says Joshua Mahony, Senior Market Analyst at IG. "One thing is for sure, the Reddit generation have brought significant volatility for markets and provide yet another risk factor to consider for traders."

Intense speculative market participation by retail traders has fuelled sizeable bubbles in some sectors of the market.

The GameStop share price surge is the prime example and focus of a new phenomenon in equity markets, whereby the stock rocketed and in doing so delivered a savage blow to institutional investors and hedge funds that were betting against the stock.

"While the activity of a small distressed gaming retailer in the US should not have a significant impact on the rest of the world there we believe the situation is causing hedge funds and their funders to go ‘risk-off’ and deleverage their investments causing funds to liquidate positions across the board," says analyst John Meyer at brokerage SP Angel.

Expectations for a volatile close to the week were raised after retail trading platforms reinstated the trade of some the most heavily targeted stocks, including GameStop and American Airlines, having suspended them on Thursday.

"An assault by small investors weaponising call options against hedge fund short positions sparked all kinds of volatility and some legendary short squeezes in smaller stocks. The ripple effects were felt across markets as some funds were apparently massacred on their short bets, forcing them to liquidate profitable long positions to cover those losses," says Marios Hadjikyriacos, Investment Analyst at XM.com.