When people make price predictions in any financial market, they have an interest in pushing logic to the limit. Remember back in January, for example, when crude oil had fallen through $55 and was the news of the day? Two opposing camps emerged. On the one hand you had the likes of T. Boone Pickens predicting a return to $100/barrel before the end of the year, and on the other some analysts (I remember one in particular from Citibank) predicting $15/barrel in the same time frame. Of course, neither has been right so far, nor do they look likely to be. The simple fact is that saying that oil or anything else will probably trade a little lower or a little higher in the near future may be accurate but it is not sexy; it doesn’t get page views or get you on T.V. Predicting vicious but unlikely moves, however, do.
That thought came to mind this week when I read this Zero Hedge article by author Tyler Durden. Zero Hedge, by their nature like to be controversial, so the prediction that we should “…sit back and watch as we witness the second coming of the bitcoin bubble, one which could make the previous all time highs in the currency seem like a low print” is not entirely out of character. In addition, those of us that hold bitcoin as a long term inflation hedge would love to see it come true. It is, however, most likely to be entirely wrong.
The logic behind the piece, that there is a huge pool of Chinese money that is poised to seek refuge from capital controls, is in many ways sound. Indeed that could well be in part responsible for the recent increase in BTC/USD to around $270 from the lows around $200. It could even drive further gains in the future to some extent, but to talk of a quick return to $1100 and beyond is just not realistic.
First, if that were going to happen, it would be reasonable to expect more of a move than we have so far seen. Yes, interest and presumably buying from China has increased since the controls were announced and that has helped, but the recent move needs a little perspective. The lows from which BTC/USD has recovered were just a short time ago and the evidence suggests that it was that move down, not the subsequent recovery that was the aberration.
We are hardly at new highs, after all. Prior to last week BTC/USD last traded above $270 just 2 months ago, on August 11th. What we are witnessing now is a retracement of the decline that came shortly after that, not a surge caused by panic buying in China. I guess, in theory at least, that could come, but the 3-month chart indicates a gradual retracement following a sharp drop, mot the other way around.
Also, in the light of other news this week, if this is Chinese money on the run (or after looking at that chart on a gentle stroll out of the country), the surge looks doomed before it really gets underway.
The linked to article at Cryptocoin News is about a recent report from the Cyberspace Administration of China (CAC) that acknowledges Bitcoin as a force to be reckoned with. In some ways, that can be seen as a positive for Bitcoin and for cryptos in general. I mean, nobody wants to be ignored, right, and I have made the point in the past that some degree of government regulation is inevitable and, if applied with a light touch, may even be necessary if Bitcoin is to fulfill its potential.
The problem is that the Chinese government is not renowned for its subtlety. If they regard Bitcoin as a force to be reckoned with then there is a good chance that they will try once again to regulate it out of existence, or at least out of The People’s Republic. I suspect that most Chinese investors who might try to move money away from capital controls would feel the same. History and the nature of the internet suggest that in the long run the government will fail, but the fact that the report from the CAC came out on October 13th would suggest that those who see bitcoin as an escape route would have already acted now that the government is taking notice.
I, like anybody who sees the potential of Bitcoin, would love to see some more price appreciation in the near future, but the last thing that the currency needs is another bubble followed by another bust. That could prove fatal to the still young and somewhat fragile idea. Fortunately, despite the predictions of some though, that looks unlikely.