Why "Bitcoin Bubble 2: The Sequel" is Not Coming Soon to an Exchange Near You

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.

  • This slideshow takes a look at Bitcoin and its short history, as well as a few other virtual currencies that have left their marks in the world. Shutterstock photo.
  • Bitcoin was a href='http://www.newyorker.com/magazine/2011/10/10/the-crypto-currency' target='_blank'invented in 2008 by Satoshi Nakamoto/a. It was released as open-source software in 2009. Nakamoto, who claimed to be a  36-year old Japanese man, said he created bitcoin in response to the financial crisis at the time. Shutterstock photo.
  • Bitcoin is a virtual currency (technically a cryptocurrency), and there are 21 million bitcoins which can be mined. As of August 2015, about 14,500,000 bitcoins have been mined. iStock photo.
  • A cryptocurrency is a href='http://www.coindesk.com/bitcoin-digital-currency-virtual-one/' target='_blank'based on the principles of cryptography/a - namely, based on a peer-to-peer network. Most currency in the world can be held digitally (like gift cards); currency that's virtual, like bitcoin, exist only on the internet. Some financial analysts consider bitcoin a commodity. Shutterstock photo.
  •  At first, a single bitcoin was worth less than a penny; as of August 2015, a single bitcoin is worth about 215 U.S. dollars. Shutterstock photo.
  • He announced in April 2011 that he was moving on from bitcoin, leaving that life behind. A highly controversial 2014 Newsweek article claimed to have identified Nakamoto, but the bitcoin creator came out of hibernation to a href='http://www.cnbc.com/2014/03/07/real-bitcoin-creator-i-am-not-dorian-nakamoto.html' target='_blank'say that he was not the person identified/a in the Newsweek article. Newsweek Magazine cover.
  • The blockchain is the heart of bitcoin. It's a public ledger that records all bitcoin transactions, open to all users. And it's incredibly secure, making tampering very difficult. The blockchain has drawn the interest of many financial companies. Even a href='http://www.bloomberg.com/news/articles/2015-07-23/nasdaq-expects-to-be-first-exchange-to-use-bitcoin-technology' target='_blank'Nasdaq is planning to incorporate blockchain technology/a. Shutterstock photo.
  • Bitcoin has faced its share of controversies. Due to anonymity, people can use bitcoin to fund illicit activities (see: a href='http://www.bloomberg.com/news/articles/2013-10-03/fbi-snags-silk-road-boss-with-own-methods' target='_blank'Silk Road/a). Another major dustup occured during the a href='http://www.nasdaq.com/article/a-480-million-mystery-the-saga-of-mt-gox-cm507054' target='_blank'$480 million collapse of Mt. Gox/a. Shutterstock photo.
  • However, bitcoin is becoming widely accepted, with retailers like Microsoft and Baidu accepting bitcoins. It is by far the most well-known digital currency, but not the only one. Shutterstock photo.
  • It was launched in 1996, and was the a href='http://www.wired.com/2009/06/e-gold/' target='_blank'first digitial currency to get widepsread usage/a. It let people open accounts based on the value of gold, but was ultimately shut down by the U.S. Federal government after its founder pleaded guilty to money laundering-related crimes, and running an unlicensed money transmitting service. Shutterstock photo.
  • In 2007, a href='http://www.bankingtech.com/196932/virtual-currency-ven-takes-on-bitcoin/' target='_blank'Ven was launched/a. It is now seen as an alternative to bitcoin, based on currencies, commodities, and carbon futures, making it an environmentally conscious currency. It is listed on the London FX trading venue LMAX Exchange. Shutterstock photo.
  • Originally conceived as a joke, it became popular very quickly, reaching a capitalization of $60 million by January 2014. (The meme was based on an image of a Shiba Inu dog. a href='http://knowyourmeme.com/memes/doge' target='_blank'Read more about that here/a) One year later, that number has fallen to $13.5 million. a href='http://motherboard.vice.com/read/talladega-shibe-josh-wises-highlights-in-the-dogecar' target='_blank'Its most notable moment came when the community sponsored a NASCAR racer/a, which led to the Dogecoin car being featured at several high-profile races.
  • This digital currency, along with DopeCoin hopes to make it a href='http://smallbusiness.foxbusiness.com/technology-web/2014/03/20/dopecoin-potcoin-want-to-solve-marijuanas-banking-problems/' target='_blank'easier for marijuana businesses to process money/a. PotCoin focuses on the legalized marijuana industry. Shutterstock photo.
  • As mentioned earlier, bitcoin's blockchain technology has drawn a lot of interest, even to the point where some are saying that the a href='http://www.forbes.com/sites/gregoryferenstein/2015/07/29/former-obama-tech-advisor-explains-how-bitcoin-could-transform-government-in-5-quotes/' target='_blank'blockchain is actually more important than bitcoin itself/a. Shutterstock photo.
  • But digital currency has the potential to a href='http://www.nasdaq.com/article/bitcoin-and-remittances-can-it-work-cm504136' target='_blank'become much more democratic/a, with the rise of crowdfunding and microlending taking the place of more traditional bank loans. New payment systems like Paypal and Apple Pay are making it easier for people to spend money online. And currencies like bitcoin could be used by those who live in emerging markets to save money while making exchanges, or even store value in a more stable currency rather than inflationary fiat currency. Shutterstock photo.
  • Regulation of bitcoin, however, remains a contentious issue. Bitcoin adherents don't believe in regulation - after all, that was why bitcoin was made in the first place, they argue. But others see that bitcoin's growth and ultimate mainstream adoption requires some regulation. a href='http://fortune.com/2015/04/23/theres-big-pressure-on-new-yorks-bitcoin-regulation-plan/' target='_blank'New York was the first state to roll out a policy/a, but more could be coming soon. Shutterstock photo.

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