Where are Cryptocurrency prices heading this year?

It’s fair to say that 2018 has brought mixed news for the alternative currencies market. Since the turn of the year, typical Bitcoin prices have shown much less volatility. Gargantuan daily swings seem to be a thing of the past. The bad news is that the trend for Bitcoin (and most other crpytocurrencies) has been steadily downward. Worse still, there appears to be no real news that may give support to the price and this trend could still have further to run. The days of Bitcoin featuring in the news reports seem to be over, and the public understanding of what it is doesn’t seem to have improved one jot.

And I would probably include myself among the ignorant. Overall I’m fairly neutral on coins. I understand as an alternative asset class they could be viable in future, however no matter how hard people try, realistic real-word uses still seem far away. For every upside I can think of there are as many downsides. It’s certainly my belief that the chances of Bitcoin being virtually worthless in a few years are about as good as it being valued at £50,000. 

My experiment to buy and sell the dips has not functioned that well. In absolute terms I have a profit, in reality though I have some high priced coins that theoretically in loss after I sell them. One of the main failures is that the price action has not particularly been kind. I currently have 0.01 BTC bought at 6,000 EUR and 8,000 EUR where the market has not recovered sufficiently and as such I did not sell them. Although it should be said this is still early days. I trade on GDAX and the graph isn’t pretty:

I am not particularly bothered by this. As I said in the previous article, I’ll be happy to keep on buying at lower and lower prices. Holding perhaps 0.25% of your wealth in these currencies as I see it is not that much different than putting some cash into speculative business. So what will happen to the price? I’ll set out my thoughts here. These are only my opinions, yours may vary.

What is driving the price?

It’s clear that the volume of trading in Bitcoin is massive. Relative to its market cap, around 10% is traded per day. Imagine £113m of Plus500 shares being traded in one day – it would be noteworthy for sure. Having said this, some factors may go some way to explaining why this is. At some exchanges like GDAX, trading Bitcoin is free (if you don’t buy at market and make orders). That lends itself nicely to people scalping the market (buying at a fraction underneath the sale price), but this needs big money to make it worth someone’s while and a risk appetite perhaps off the scale.

What is clear though is that the big dips in price we are seeing is not due to amateur investors trading their 1 BTC or similar. In my belief there are quite a few people from the early days of Bitcoin still sitting on some tremendous capital gains. Given that nobody can predict the future a decent strategy may well be to liquidate coins as the market rolls on, and in a downtrend like this the propensity to sell becomes greater – $7,000 might look like a great price if the price reversal were to go right back to $1,000. Valuation of Bitcoin is next to impossible, with the models used to calculate the magic ‘$100,000’ price being full of assumptions.

Can the price recover?

I’m sure that in 10 years time we will look back at the cryptocurrency boom much in the same way as the dot-com boom. There are a whole raft of coins set up which are little more than scams – a few nicely written white papers attempting to justify why they may be needed. In many cases the underlying cause appears to be enrichment of the owners and wanting a slice of the action rather than genuinely solving public wants and needs.

That being said, much like the dot-com boom I do believe there will be some diamonds from the rough. Something will evolve which does provide genuine improvement to living; and that currency will end up flourishing.  But in order for that to happen I do believe that these currencies have to be legitimised by society at large. Bitcoin is on its way there, but it is not quite there yet. Few retailers accept it. The prospect of making transactions better seems quite slim at the moment. 

Contactless payments work just fine at present for most users. The idea of your Bitcoins being placed on a card and using the same technology to transfer them to a merchant seems entirely possible but other factors would work against it. At present, transaction limits are low for contactless, because in the case of a card being stolen, transactions can still go ahead. For the potential thief, the limits are a barrier to any upside, because they may surmise that gaining £30 worth of goods is not worth the risk of their face being seen when they make the transaction. And as anyone that has been a victim of card or identity fraud has known, in the majority of cases the bank end up reimbursing you – an upside of the centralised system. The same would not happen in crpytocurrency – once your money is gone, it is gone.

Bigger drawbacks also appear on the macroeconomic level – in the main, governments would oppose cryptocurrency. Reducing demands for their own currency overall is not a good thing for a country and this is before the unregulated and anonymous nature of the technology. Even today not much is known about the Bitcoin creator Satoshi Nakamoto, even though by virtue of his stash of coins he (or they) are an incredible source of power which hasn’t been displayed yet. One day their hands may be shown and who knows what leanings they may have?

One thing I believe is that the game is not over yet and we still have many peaks and troughs to go. Whilst I believe there are too many vested interests in letting Bitcoin take-off properly (government interventions and restrictions can really impede the price), there are also too many vested interests in letting the price fall to zero. The trading world appears to me to be murky and who can tell who is friend or foe? It wouldn’t surprise me at all if many of the Bitcoin forums out there were created by the big hitters as an artificial means of talking things up.

Who is a winner?

But much like the gold rush, perhaps the bigger winners alongside the early adopters were those that provided ancillary services instead of panning for gold themselves. Think about people providing accommodation, tools, and so forth. They could most likely demand amazing profit margins for the simple reason that people would pay it.

So in my view winners will be the exchanges who process the transactions, such as Coinbase. But more to home, spread betting firms such as Plus500, IG Index, CMC Markets and others now offer cryptocurrency trading and these can cater to a greater audience of people because of the facility to short, or bet against the price. On traditional exchanges like GDAX, you cannot sell Bitcoin short, you physically have to own it first. No such problem for the other firms, as you simply trade a CFD (contract for difference) which is a basically a number which corresponds to the price of the asset.

A quick check of this page shows that the potential for these firms is enormous:

The spread (difference between buy at sell) is 65 points – a huge margin. By contrast, if you asked to trade the FTSE100, you could do so on a spread of 1 point, perhaps even less on other platforms. Whilst the bigger spread reflects the bigger risk of the product, they really offer the chance for these firms to make a big guaranteed profit, as they can simply hedge themselves elsewhere. Given this, it is only a matter of volume.

As Plus500 remarked;

Plus500 has experienced strong volumes in crypto currency CFDs and has seen increased interest throughout the year in a category which we introduced in 2013. The Company’s broad offering enables customers to participate in the volatility of multiple crypto currencies, without owning the underlying asset. Plus500 remains focused on risk management which includes setting appropriate risk and leverage for all the instruments traded on its platform.

The profits can’t be understated enough; on a good day Plus500 profit in excess of £1m from these trades alone, representing these strong volumes. And with the company able to expand quickly, their valuation has continued to seem on the cheap side.

I am long in both IG Group and Plus500 at present, and believe that these companies will be beneficiaries of rising currency prices. 

Pure Passive Investor. Always looking for ways to make money (but not myself) work harder.

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