COMMENTARY – Volatility in Bitcoin price is good news

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January 1, 2017: Bitcoin was trading at $998.47.

May 25, 2017: Bitcoin traded at $2,800.

In less than five months, the price of this cryptocurrency jumped by a whopping 180%! The bitcoin price has more than doubled so far in 2017, climbing above $2,400. With the year that the bitcoin price is having, it’s hard to imagine that the digital currency is still relatively new in the grand scheme of things.

Global bitcoin prices have been experiencing quite a bit of volatility since. Like all market trades, volatility is a sign of robustness of the instrument. In the past couple of days, the price of bitcoin rose to as much as $2,329.64, before falling more than 5% to $2,218.74. The prices then recovered somewhat, rising to $2,245.97.

In fact the entire week, bitcoin prices experienced a notable rally, reaching almost $2,800 on 25 May, before plunging more than $400 to almost $2,350 less than four hours later. This price volatility continued after the sharp drop, as bitcoin recovered to $2,640 early on 26 May before falling once again, this time losing more than $700 and declining below $2,000 on 27 May. Bitcoin prices bounced back the following day, rising to $2,320.82 on 28 May.

Bitcoin’s recent price volatility has coincided with sharp fluctuations in the market capitalisation of all public cryptocurrencies, which surged to $91 billion on 24 May before plunging 40% to $57.3 billion on 27 May. Bitcoin has seen its first boom and its first bust already. It has now crashed down to about $1900.

As reported by Reuters, the bitcoin price surge came as a result of new tokens being created for crowdfunding start-ups that use blockchain technologies.   Blockchain technology, is, in short an “underlying method” of bitcoin and allows for permanent records of “blocked” transactions.

Surprisingly, the genesis of the upward rally can be attributed to the recent cyberattacks. The recent WannaCry ransomware attack that spread across over 300,000 computers in 153 countries on May 12, brought Bitcoin into the mainstream. In many instances the hackers asked for bitcoin as a ransom to get the software back.  Similarly, threats to release a Disney film (yet to be titled) also asked for bitcoin as ransom, which CBS News said highlights bitcoin’s “dual nature these days as an increasingly prized and acceptable financial asset.”

Of course, there are other contributing factors: CNBC reported  that Chinese investors are looking for safe haven assets outside of China, noting that the Chinese yuan has been relatively week over the last two years. Consider this: Bitcoin up 100% in under 2 months. Shanghai down almost 10% same timeframe, compared to most global stocks up. Coincidence?

Japan, Russia like bitcoin

Adding to Bitcoin’s favour has been Japan deciding to accept Bitcoins as a method of payment. Russia is has also made it known they are considering bitcoin as a legal payment method by 2018.

Add to these the US Securities and Exchange Commission is now reconsidering the Winklevoss bitcoin-exchange traded fund for Bitcoins after rejecting the proposal just a couple of months ago. However, continuing speculation surrounding the possible ETF has boosted the bitcoin price.

Indeed, it’s been a stellar year for the digital currency, seemingly putting safe-haven assets like gold in the dust, at least in terms of price. Those in the know are not unduly worried by this latest crash.

Like most rallies, as the price appreciated, people took to the press and hyped up the price action. As the price declines, people on social media and in the financial media make it seem as though all is lost and the price will eventually touch zero!

Putting the hysteria aside, all we are seeing are the mechanics of volatile supply and demand driving the price of an asset. However, the fact that new individual buyers and sellers are being introduced to the digital currency every day in significant numbers lends credence to the belief that these giant price swings are nothing more than growing pains for the digital currency that are compounded and catalysed by the media.

Bitcoin is certainly positioning itself to make history. Andrea Merdi, founder and CFO of bitcoin exchange, the Rock Trading, has been quoted as saying: “I’m not worried about bitcoin … most likely we will see a correction, but the long-term trend has been and will be always up.”

That said, with Japan officially accepting bitcoin as a payment method, Russia looking to do the same, and the SEC reconsidering the Winklevoss Bitcoin ETF, analysts predict interest in the digital currency is only poised to grow from here.

Indeed, Bitcoins are becoming an increasingly popular investment option, even in the face of volatility, as it can “preserve value against currency devaluation.”

 

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