Bitcoin has since its inception, and especially during its 2017 growth spurt, become a bit of a culture, a religion almost. If you’ve heard about bitcoin from somehow, they likely sounded really passionate about it and excited to explain it to you. Below Fiona Cincotta, Senior Market Analyst at City Index, talks Finance Monthly through the bitcoin investment craze.
In 2009 when the bitcoin was invented, very few people thought it was worth a second thought. In June of 2009, a bitcoin was worth $0.0001. Even a year ago no one was really taking about bitcoin. It was a virtual currency that existed for those that were technologically advanced enough to understand it.
As humans, the feeling that we have been left behind or the feeling of missing out, is not one we relish. In many cases this is magnified when money is involved. Conversely, the feeling that we have jumped onboard the right ship is something we love to shout about, something that more and more bitcoin investors are doing. As the price of bitcoin continues to rise, the interest that followers pay to the virtual currency and the hype surrounding it grows exponentially. As the price goes up, so does the hype.
Bitcoin reached a staggering new all-time high on 20th November as the virtual currency broke through $8000 level for the first time, not just the first record high, but the third or fourth record high within so many weeks. Several new developments surrounding bitcoin have aided it’s 48% rally from $5500 just one week earlier.
Whilst the link between the rising price and growing following of bitcoin is indisputable, several recent developments have also increased its legitimacy. Firstly, CME Group plans to offer bitcoin futures from December 10th. Futures are a mechanism of agreeing to buy or sell an asset at a future date and the contracts can be used as a method of speculating on the assets price movement over time. CME’s support for the currency is giving it a legitimacy in the financial world that up until now it appeared to be lacking.
The move by the CME will also put more pressure on the big investment banks to join the party. So far, Goldman Sachs has suggested it could be open to the idea of a bitcoin desk, whilst JPMoragan have also expressed an interest in opening a bitcoin desk to serve clients’ needs. But could more legitimacy just encourage bitcoin followers to continue talking up what is starting to look like this generation’s dotcome bubble. Is the bitcoin a great example of investor enthusiasm driving to fever pitch, before it crashes?
Yet, the bitcoin religion is not just about an apparently phenomenal investment. To some of those involved, bitcoin is the future of money. It is not unheard of for bitcoin enthusiasts to compare where the bitcoin is now, to where the internet was in the 1990’s. One bitcoin investor said “bitcoin is one of the most important inventions of humanity. For the first time ever, anyone can send or receive money, with anyone, anywhere on the planet, conveniently and without restriction. It’s the dawn of a better free world.” Another claims that mankind “has never really owned their own money, it’s always been owned by their rulers. Bitcoin gives the ability for people to actually own their own money.” Here we can see that to some the bitcoin religion goes far beyond the investment itself and is the cusp of a social revolution.
Social revolution, new religion, or not, focusing on the bitcoin rather misses the point. More attention should be switched towards the blockchain, the technology behind the bitcoin. Whilst the technology is complicate the idea is simple, Blockchain technology enables us to sends money directly and safely from me to you, without going through a bank, paypal or credit card company. Blockchain technology has the potential to bring with it widespread change. Whilst JP Morgan CEO Dimon, called bitcoin a fraud, his bank has been using underlying blockchain technology to develop new processes. Blockchain technology is still some way off going mainstream, in fact the bitcoin bubble may have even popped before blockchain goes mainstream. Rather than the internet of information, the blockchain (rather than the bitcoin) could be the internet of value.
According to data supplied by industry website CoinDesk, last Sunday around 8pm London time, the bitcoin hit a record high of $8,101.91, surpassing nay previously recorded price on the prime cryptocoin.
This was a surprising turn of events, though expected in such a volatile market, as on Sunday November 12th the bitcoin had fallen back down to $5,500 following a huge sell-off.
The difference in a week represents more than a 47% price increase.
Nicholas Gregory, CEO of the cryptocurrency business enabler, CommerceBlock, told Finance Monthly: "Bitcoin hit a new high early Friday and has effectively besieged the psychological $8,000 mark in the process.
"Bitcoin surged on the suspension of the SegWit2x hard fork but the current momentum is less technical than systemic.
"The cryptocurrency's momentum is being driven by a growing sense among speculators that the banking industry is firmly in its cross hairs.
"Increasingly, traders and speculators are looking at banks as Blockbuster Video and Bitcoin as Netflix.
"CME Group's futures launch, which has the potential to open the floodgates of institutional money, has compounded the fundamental narrative within bitcoin that it offers a frictionless and low- or zero-fee alternative to the global banking system.
"By announcing measures to contain the volatility of bitcoin, CME Group ironically boosted Bitcoin even further.
"Again, this represents accommodation rather than repudiation, and the cryptocurrency surged accordingly.
"The message being given to the markets is that while they're not perfect and will need to be treated with kid gloves, Bitcoin futures, and by default Bitcoin, can work."
Below Kathleen Brooks, Research Director at City Index, provides commentary on the latest bitcoin affairs.
Bitcoin is recovering from one almighty correction last week where it dropped from a high of $7,882 to a low of $5,605 in just three days. That is a drop of nearly 30%, which is technically bear market territory. However, this is Bitcoin and due to this it doesn’t react the way other asset classes do. At the start of this week Bitcoin is up $1,000, and has retraced nearly 50% of last week’s decline.
Factors that drove last week’s decline in Bitcoin included:
Looking at the factors that may have driven Bitcoin’s sell off, most appear short term, and indeed, the sharp bounce back on Monday suggests that traders are using any dip as a buying opportunity.
So, where could Bitcoin go next?
This is a tough one to answer as Bitcoin appears to be a runaway train overcoming any obstacle thrown in its path. From a technical perspective, there is nothing to stop Bitcoin hitting $10,000 per USD (see chart 1), as long as we close above $6,500 today. Usually when a price moves through a big psychological level it continues to move higher rather than pausing or reversing course, thus $10,000 could the start of life above 5-figures for Bitcoin bulls. Thus, any future sell offs, and we warn you that they can be severe, could be used as further buying opportunities.
Perhaps the biggest challenge for Bitcoin will come when volatility elsewhere starts to rise. If the Vix was to surge like it did back in late 2015/ early 2016, then traders may lose interest in Bitcoin and pile into other fast-moving asset prices. However, for pure speed and adrenalin, nothing beats bitcoin’s price movements right now. It’s great if you can pick up on the dip and ride the wave higher, but it is not for the faint-hearted.
Source: City Index and Bloomberg
With cryptocurrencies building stable ground in the currencies markets, and ICOs hitting headlines globally, here Richard Tall, Partner and Head of Financial Services at DWF, discusses the challenge of counterfeiting problems within the crypto markets.
As we have experienced in the post-2008 era, the value of a currency depends on the market's perception of its security. People want to hold assets, including currencies, which are generally recognised as being safe and fungible, and which they can swap for something they need - whether that be food, shelter or something else. Currencies that are recognised by others are of benefit to the holder. But the moment there is any doubt as to their heritage, they become less so.
Counterfeiting has long been a thorn in the side of any currency’s heritage. But now, with cryptocurrencies coming to the fore, will counterfeiting continue to exist? And if so, what could the repercussions be?
Counterfeiting capabilities
Some of us may be familiar with Operation Bernhard, in which Nazi Germany sought to destabilise sterling through the printing of £5 notes. Aficionados of the film The Eagle has Landed will recall the significant amounts of forged £5 notes carried by the paratroopers.
Now, the passing of an individual forged note does not undermine faith in a currency. But, if a retailer were to receive a number of these which were later rejected by their bank, it follows that the retailer would be unwilling to continue to accept that note. This is still the case today and naturally, retailers are wary of high value notes which open them up to the risk of loss.
Exponents of true cryptocurrencies will tell you that they are incapable of counterfeiting - and the short history of cryptocurrencies bears that out. However, there have been scandals - for example, Mt Gox and the ethereum DAO attack - which have given rise to significant losses.
Let me elaborate. Mt Gox and similar cyber-attacks follow the same sort of pattern as normal cyber-attacks with the hacking of accounts and removal of the contents. The ethereum DAO attack took advantage of a bug in the system, which it seems quite a few people knew about. And as blockchain is open source and anybody can get to it, there will always be some brainbox out there who can do something befitting of a James Bond film.
In contrast, if you instruct your stockbroker to buy you shares in XYZ plc, you rely on your stockbroker to actually buy real shares in XYZ plc, and not something which they think is XYZ plc shares. Afterall, as a regulated entity, the stockbroker has obligations, and if they breach those then they have a regulatory problem. They will therefore trade via particular systems with certain counterparties to keep themselves, and your trade, safe.
Structural weaknesses
If you go onto a cryptocurrency trading platform, you are relying on that platform being keyed into the right blockchain to deliver to you what you ordered. A blockchain itself should be impenetrable to the malintent. However, the whole point of the blockchain is that it is a public peer to peer network. If I were a James Bond villain, I would look at nefarious means by which I could convince everyone that my blockchain was the right one.
In a way, this happens when a cryptocurrency undergoes a hard fork, which is the mechanism by which a hacked network can "roll back" to the pre-hack period or when a network needs updating. Hard forks can take various forms, but the basic premise is that when one happens, a new blockchain is created, and usually there will either be disruption to the service; preventing transactions between peers, or gross instability introduced to the system; leading to equally gross price fluctuations.
So, if I were an incredibly clever, evil mastermind and was bored of hacking crypto wallets or wallet providers (a bit like hacking a bank account) and wanted to head to the top of the criminal mastermind league table, all I would need to do is to convince trading platforms and wallet providers that my blockchain is the right one. In Operation Bernhard, the premise was the same; the enemy simply wished to convince the UK populace that their fivers were the right ones, so nobody would trust the real ones. The desired effect? Chaos and economic uncertainty.
Could this possibly happen with cryptocurrencies? Yes. But it has little to do with the sanctity of a cryptocurrency's blockchain, and much more to do with the security systems of the cryptocurrencies' platforms and wallet providers, and the extent to which they are able to verify that they are dealing with the right counterparty.
Reducing the risk
One of the straplines for using cryptocurrencies is that, as peer to peer networks, they remove the overheads associated with credit and banking. However, the overheads for credit and banking arise because those entities provide a particular type of service, and a user of that service is able to rely on being made whole if it all goes wrong for any reason - such as when a system is hacked.
Blockchains have huge numbers of applications, but one of their overwhelming threats is their public nature. It's why sophisticated networks of users deploying the blockchain for commercial purposes will most likely do so through private networks, with a view to security enhancement. Yes, this might defeat the point of cryptocurrencies for many - but it'll also reduce the risks associated with cryptocurrencies for many more, enabling them to become the functional currencies most of them seek to be.
Russia’s plan to launch its own cryptocurrency, dubbed the ‘CryptoRuble’, is currently unfolding as President Vladimir Putin has given the green light for its go ahead.
This move will put Russia on the digital currency market and consequently allow Russian currency to rival the current cryptocurrency leaders such as Bitcoin, Bitcoin Cash and Ethereum.
Minister Nikolay Nikiforov, the Russian government’s Top Communications Official, says the authorities plan to completely regulate the ‘CryptoRuble’.
“I am so confident to declare that we will run CryptoRuble just for one simple reason: if we don’t, our neighbours in the Eurasian Economic Community will do it in a couple of months,” He told Russia Today.
“When buying and selling a CryptoRuble, the rate will be 13 percent from the earned difference. If the owner cannot explain the reason for the appearance of his CryptoRubles, when converting them into Russian rubles, the tax for him will be 13 percent of the total,” he continued.
However, Andrei Barysevich, Director of Advanced Collection at Recorded Future, seems to think Russia has missed the mark on this matter:
"With the widespread introduction of supporting infrastructure only available to the government-backed cryptocurrency and swift oppressive regulations aimed at bitcoin and other blockchain currencies, the Russian government is frantically attempting to regain the control of the “runaway train" by introducing a legitimate alternative.However, Russian lawmakers seem to be missing the main point.
“Aside from criminals, the majority of the people purchase bitcoins, not because of convenience or anonymity, but rather the staggering profit levels it provides. The Russian Government is unlikely to see a widespread adoption of the CryptoRubles unless Moscow is able to convince people that the value of it will surge."
Do you think governments introducing cryptocurrencies is a strong move in opposition of digital currencies, or that it may actually function via central regulation and oversight?
With digital currencies taking the financial world by storm, the banking industry is being revolutionized from the outside. And it’s about time. The global banking system, which relies on currencies whose value is partly determined by the people in power (and partly by the demand) and thus, spin the wheels of the capitalist machine, could possibly be turned inside out.
Cue cryptocurrencies. The premise is simple: They are not controlled by any particular country, which means supply depends on demand and the value depends on the movements within the blockchain. However, the programming gets far more complicated than that, as does their relationship with “regular” money and banking. It’s a love-hate relationship, or at least the banks love to hate them, seeing as the more transactions that are performed using crypto, the less power they have to maintain control of the financial capital in their country, and subsequently worldwide.
China was the first country to ban ICOs (initial coin offerings — the process to start a new currency). This shouldn’t really have come as much of a surprise from the country that has a bit of a history of trying to keep their population in check. When the news hit, it had a less than enthusiastic reaction from miners and investors alike. China says the move was to protect investors, which would make sense at a basic level because the Chinese stock market is less than 30 years old and investor protections need to be comprehensive enough for the ever-complicated ecosystem of alternative finance, which still needs time to develop. On the other hand, reports back in September revealed that China is hoping to eventually develop its own fintech sandbox, so their banning of ICOs could possibly be considered as a pre-emptive strike on the competition. Time will tell.
Other countries will also introduce some kind of regulation, but there’s nothing as extreme as China, yet. The USA doesn’t have an outright ban, but the strict regulations with the infamous IRS mean that you have to be an accredited investor to have the right to participate in ICOs. Malaysian officials have issued cautions and announced that there will be regulation to follow and they are not ruling out the possibility of banning cryptocurrencies completely. Most recently, South Korea has stated that strict controls are needed and there will be heavy penalties for offenders. Experts say that this is just paving the way for more control on cryptocurrencies in general. And it’s not just in Asia that governments are starting to play hardball: The banking capital of Europe, Switzerland, has introduced a code of conduct regarding ICOs and regulations for currency use.
Does this all come down to a country’s desire to regulate their own finances and wealth? Maybe. But it seems that they’re missing the point somewhat. The sheer beauty of digital currency is that they work independently of any government or central bank. And seeing as the cryptocurrency market is booming and is only set to continue, completely prohibiting ICOs in these countries is likely to be as effective as trying to ban gaming in the Bahamas, which now plays host to PokerStars' annual high-stakes championship tournament for poker.
As for bans in more countries, there are a couple of possibilities. Some countries will follow suit and introduce regulations on both ICOs and cryptocurrencies, making them lose what made them so appealing and successful in the first place. And others will allow investors to get in on the ground floor of this unregulated space for them to increase wealth in the hope that it benefits the country of the investor. Given the plans for economic growth in Southeast Asia, investors are sure to be plugging for this second option and subsequently leaving their competitors in the dust.
Of course, there will always be those looking for loopholes. After all, where there is a will, there is a way, and when the value of cryptocurrencies increases 400% in a six-month period, a will is easily found. It’s also possible that something as simple as a name change might suffice — premines are becoming an increasingly popular concept in the US at least — until regulations affect these as well, creating a cycle of innovations within the digital currency world.
