Here’s a simple quiz question for you.
Which asset…that could help shape Australia’s economic future…has plunged in price this year by more than 40%?
If you said ‘iron ore’…you’re wrong.
The answer is bitcoin.
Yes, bitcoin…the currency of choice for thousands of internet-savvy people.
Free Reports:
The digital cryptocurrency’s value slipped below US$400 per coin late last week. It slumped to an intraday low of US$380.75 on Friday.
The price action has made fools out of the ‘smartest men in the room’. Investors who bought bitcoins up to November’s US$1,145 peak are licking their wounds.
So what’s gone wrong?
Well, I can see several reasons why bitcoin’s value has cooled off.
Does that make now a good time to think about a bitcoin investment?
Well, that depends…
Bitcoin suffered a stormy end to last week. You can see it in this two-week chart of the cryptocurrency’s value in US dollars.
The price enjoyed a reprieve yesterday after PayPal confirmed broader support for bitcoin. But I’m still scratching my head as to why the reaction was so strong, given that the PayPal story is more than two weeks old.
Anyway, the longer-term trend has been negative…and ‘in US dollars’ is your first hint as to why bitcoins have broken down.
America’s currency is riding a wave of strength. Traders’ bets on an interest rate rise next year have buoyed the greenback.
That means the US dollar is pulling in money like a magnet. It draws cash away from other currencies and commodities.
You might define bitcoin as a currency, a commodity or (as I do) something in between. Either way, the outcome here is the same…a lower value in terms of US dollars.
But bitcoin has been sinking against any currency you care to mention…not just the USD.
That means nastier trends must be pushing down the cryptocurrency.
I tend to ignore most technical charting analysis. I believe asset prices move looking to the future, not because of what happened in the past.
But you can’t ignore bitcoin’s intense breakdown through $450 late last week.
It shows all the highlights of a large group of traders who probably had $450 as their lower bound exit point. Once the price breached that figure, they raced for the exit.
A perfect storm of technical, fundamental and macro headwinds is buffering bitcoin.
I never thought I’d point to the central bank of Bangladesh as a market-mover. But the Bangladeshi policy-makers recently made their country the fourth to ban bitcoin.
Their central bank says it’s illegal to deal in cryptocurrencies. Bangladeshi users face up to 12 years in jail.
I’ll put to one side the trouble…even futility…of enforcing a judgement like this.
But it blows an ill wind across a sector where the biggest challenge is guessing how the laws will shape up.
As I wrote to you back in July, ‘it’s hard to see the regulators staying out of bitcoins. So investing in any bitcoin-related business really is a big risk without knowing what the regulators will do.’
Don’t underrate your government’s ability to re-write the rulebook to suit its goals.
Regimes may choose to pump up to billions of taxpayer dollars into surveillance of cryptocurrency users. They could pursue policies that demonise this young industry.
If that happens, the authorities could snuff out bitcoin faster than you think.
Heck, there’s one thing the markets should have taught you over the past six years. Governments and central banks can act in an extremely synchronised fashion when the stakes are high enough.
If you’ve read our tech analyst Sam Volkering’s and my articles on bitcoin, you’ll know it’s tricky to understand the forces that drive its value.
New merchants are adopting bitcoin as a payment option every day. Cryptocurrency awareness is rising. Nobody is arguing with that.
But the experts can’t agree on how merchant adoption and ‘mining’ operations move the bitcoin price.
Most bitcoin fans have viewed moves by firms like Dell Inc [NASDAQ:DELL] or Expedia Inc [NASDAQ:EXPE] to accept bitcoins for laptops or hotel bookings with glee.
But many observers are coming around to a different conclusion.
Lots of merchants convert bitcoins they receive from customers into traditional currency straight away. That puts selling pressure on the bitcoin price.
As long as large merchants view bitcoin as a hot potato to palm off as quickly as possible, this selling pressure will keep a lid on its price.
So bitcoin may become a victim of its own success.
This flies in the face of what bitcoin fans would have you believe…but adoption may do nothing to drive long-term demand.
This makes holding large volumes of bitcoin a risky investment.
By the way, that’s not the only dynamic that looks bearish for bitcoins.
If you follow the Aussie economy, you’ll know many iron ore miners are struggling to make a profit. That has everything to do with the commodity ailing near US$80 per tonne.
Similarly, bitcoin miners may struggle to make a profit with the cryptocurrency down at around US$400.
It costs plenty of money and takes a lot of computing power to mine bitcoins on a large scale.
As the job has gotten more complex, bitcoin miners’ costs have risen.
These cost pressures could force miners to sell their freshly unearthed bitcoins as quickly as possible. If that movement steps up, the bitcoin price could grind lower.
Some think these trends will consign bitcoin to niche status…or even ‘history footnote’ status.
I don’t agree with that.
Despite certain regimes’ best efforts, cryptocurrencies are here to stay.
The bitcoin system has developed for several years. But it’s too early to tell what a fair and stable price will be for this digital currency.
Just as Dom Carosa, chairman of the Future Capital Bitcoin Fund, said earlier this year, ‘we’re all exploring without a map’.
These crosscurrents play havoc on the bitcoin price and the value of firms in the industry.
That creates chances to buy mispriced assets…but it brings a huge dose of risk.
That’s why I don’t endorse any bitcoin stocks to my readers in Australian Small-Cap Investigator.
I suspect Sam Volkering has a similar rationale in holding back on a bitcoin stock tip for Revolutionary Tech Investor.
If you want my advice on how to weather the storm hitting bitcoin, here it is…don’t invest just yet.
Regards,
By Tim Dohrmann+
Small-Cap Analyst, Australian Small-Cap Investigator
The post The Storm Hitting Bitcoin…and How You Can Weather It appeared first on Stock Market News, Finance and Investments | Money Morning Australia.
