Bitcoin-Mania as BTC Hits $10K, Analyst Debate on Outlook Intensifies

Crypto-currency Bitcoin has risen above $10,000 as it continues to rally higher; it appears unstoppable, but is it worth it? We hear the latest analyst views

In Amsterdam in the 17th-century, speculation on Tulip bulbs became so rampant that prices reached undreamed of heights; the frenzy which accompanied this period of investment history became known as 'Tulipmania'.

'Tulipmania' is now used to describe any market where speculation becomes the main driver to higher prices, which increasingly become divorced from fundamentals.

During this time the price of a single tulip bulb rose to such dizzying heights that a single bulb of the most prized 'Viceroy' variety cost 2500 Dutch Guilders.

To put that into perspective the cost of a bed at the time was 100 Guilders, and well-fed oxen would set you back 120.

A similar effect seems to be taking place with crypto-currency Bitcoin, which has risen from $1,000 at the start of 2017 to the $10,000 level today - a new landmark high.

Despite the stratospheric ascent, a number of analysts believe it can extend further.

"Despite fears about the Bitcoin 'bubble' bursting, the price of the new digital coins is going through the roof. Indeed, the increasing demand pressure from investors and speculators makes the case for an even further increase in Bitcoin prices in the near future," says Daniele Bianchi of Warwick Business School, an Assistant Professor of Finance who researches crypto-currencies.

"As the supply of Bitcoins is kept fixed by the underlying protocol, price increases are essentially due to increasing demand," adds Bianchi, "Bitcoin is becoming more like an asset class rather than a method of payment. This is something that the public and regulators should realise to fully understand the price dynamics of Bitcoin."

The total value of the bitcoin market has exploded from $8bn at the start of 2017 to over $165bn now, and, market capitalization now "exceeds that of McDonald's," according to Swissquote Analyst Yann Quelenn.

Quelenn thinks Bitcoin will continue to rise as it is an "entry into many other crypto projects," and because of its the only currency which can be used to purchase an initial coin offering in any of the other - currently 700 - new crypto-currencies which have sprung up since its inception.

It will also rise because it can "store and transfer value," like any regular currency.

It must however be pointed out that Swissquote - the online Swiss bank - would back further successes in Bitcoin as on Novemer 23 they announced they are to offer the first actively managed Bitcoin Certificate traded on SIX Swiss Exchange.

Underpinning Swissquote's decision to back the cryptocurrency is a fundamental belief in the value and durability of Bitcoin.

"Alt-coins carry risk, but for most people concerned over the abuse of monetary policy and decentralized forms of wealth exchange, they are the logical direction. Whether through Bitcoin, Dash, Litcoin, or other alt-currencies, people will continue to opt out of governments’ monopoly on money," says Swissquote economist Peter Rosenstrecih.

Not convinced that the Bitcoin phenomenon has legs is Aussie lender ANZ, who question whether Bitcoin has got legs.

They quote from a recent report from the Reserve Bank of Australia (RBA) which highlights the fragility of Bitcoin rather than its durability. 

"Crypto-currencies currently fail most of the basic tests of useful ‘money’: as a broadly accepted medium of exchange, as a store of value (too volatile), or as a medium for the extension of credit (because of its pseudo-anonymity)," says ANZ Chief Economist Sharon Zollner.

Indeed back in 17th century Amsterdam Tulipmania ended in disaster after the market crashed; some are are asking whether the same fate will befall Bitcoin.

Bitcoins and Tulips are different of course - one is a commodity with a real 'presence' and use, albeit mainly aesthetic, and the other is a virtual currency.

Courtesy of Wikipedia

A Tulip, therefore, can have a 'fundamental value' - at least of sorts - whilst to ascertain the value of a crypto-currency is more problematic.

ETX Capital, for example, make the point that Bitcoin's fundamental value is difficult to calculate making it unsuitable for investors, especially institutional investors, thus it will always be marginal.

Valuations are problematic as investors don't know enough about it or have the "depth of data to fairly value Bitcoin," says ETX Capital's Senior Market Analyst Neil Wilson.

Also like ANZ's Zollner, Wilson points out Bitcoin's unsuitability as a 'store' of value because of its high volatility.

Yet despite this there are signs Bitcoin is shifting from being a marginal financial asset. 

The world's largest futures exchnage, the CME group recently announced it will be launching Bitcoin futures in the second week of December.

Also, more than 120 "cryptofunds" have launched, including some run by Wall Street veterans, according to financial research firm Autonomous Next.

Nevertheless, given the lessons from history regarding market bubbles, should investors be cautious?

Evolving Technology

One apparent limit to Bitcoin's value could lie in the technology behind it, which whilst ingenious is nevertheless also problematic. 

"The underlying blockchain technology is highly promising but is running into problems in that the size of the ‘ledger’ information that needs to be transmitted and reconciled grows with every transaction," says Zollner.

The blockchain technology underpinning crypto-currencies works a little bit like google docs excel file, in that it is a decentralized accessible database, which can be updated concurrently and simultaneously by multiple agents in multiple locations.

The problem is, however, that with each transaction, the size of the 'ledger' or file grows bigger with each transaction.

"This means Bitcoin is taking a heavy toll not only on computing power but also on good old-fashioned electrical power as trading volumes explode. “Mining” (creating by reconciling) Bitcoin is using more electricity than Ireland, and rising," adds the ANZ economist.

And as far as the size of the market goes, Bitcoin is still, "chicken feed in a macro sense, meaning a sharp fall in the cryptocurrency poses few systemic risks," she says.

Not for Real Investors

ETX Capital's Wilson does not think Crypto's like Bitcoin are fit for real investors.

He notes, for example, the continuing disparity between Bitcoin prices on different exchanges.

Earlier on Tuesday, CEX priced Bitcoin at $10,026, "although none of the other major exchanges were quite so elevated," said ETX.

The "arbitrage potential between exchanges is exceptionally large, indicative of the fact this is an incredibly immature market that is completely decentralized and unregulated," says Wilson. 

"When CEX quoted BTC at $10,026, Kraken had it at $9,748 – a gap of $278 – a near 3% spread," they note. 

Bitcoin is thus, "totally unsuitable for institutional investors."

Although, ultimately, the arbitrage potential is probably there because the market is still relatively small and therefore lacks liquidity, leading to a, sort of, 'chicken and egg' argument in relation to its viability for big institutional investors.

Unless big money gets involved and profits from the arbitrage, the market won't evolve. 

At the moment the Bitcoin market is less than $200bn in size but there is still a potential $200 trillion in still untapped global investor capital. 

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