Is this a reinvention of Bitcoin or just another passing phase?

by Shaun Richards

Over the past few weeks there has been something of a rave from the grave going on in financial markets. If we look at the news then maybe John Lennon was partly right with his “About a lucky man who made the grade” if that man or indeed woman is a holder of Bitcoin. This is how @fastFT has reported it.

The price of bitcoin soared to its highest level since January 2018, as the cryptocurrency’s recent rally shows little signs of fizzling out. In Asian trading hours on Wednesday, the price of bitcoin traded on the Bitstamp exchange rose as much as 10 per cent to as high as $12,935.58, putting the digital currency on track for its biggest one-day jump in more than a month. Bitcoin’s price pulled back to just under $12,600 in afternoon trading.

So it is back at least for now and the June futures contract on the Chicago Mercantile Exchange is doing better than that because it is at US $12,990 as I type this and peaked at US $13,172.5 overnight. If we look back we see that it did not pass US $4000 until latish in March and US $6000 on the 9th of May. If we return to @fastFT we are told this.

Bitcoin’s value has now jumped for the last eight trading sessions in a row, bringing its overall return for the year to 250 per cent. Still, the digital currency remains some way below its peak of more than $19,000 reached at the end of 2017.

The current position provokes two thoughts. Firstly as a pure chart it reminds me of the “bowl theory” taught to me some years back by a colleague. It is not complex in that you simply draw a bowl shape around such a rise and it predicts that when any fall breaks the line you will see a sharp drop which is both fast and large. Putting it another way the rally needs to keep accelerating to survive as the bowl curve gets steeper.

On the other side of the coin the mention of the US $19,000 peak reminds me of this from the 11th of December 2017.

Bitcoin is in the “mania” phase, with some people even borrowing money to get in on the action, regulator Joseph Borg said. “We’ve seen mortgages being taken out to buy bitcoin. … People do credit cards, equity lines,” he said. Bitcoin has been soaring all year, starting out at $1,000 and rocketing above $19,000 on the Coinbase exchange last week. ( CNBC )

That “madness of crowds” phase when people borrowed to get in on the previous rise, which sadly was the time in fact to get out.

What has driven this?

One factor has been the turn in expectations for monetary policy around the world. We have seen some actual interest-rate cuts by the Reserve Banks of India, Australia and New Zealand as well as hints from the US Federal Reserve and the European Central Bank or ECB. The general expectation for the latter has moved to more QE being announced in September as well as a deposit rate cut. The latter may be more significant here because whilst only a small change of 0.1% is expected it will take it further into negative territory. That would be no surprise for us on here as we have been expecting another phase in the “war on cash” but I think the acceleration in Bitcoin has been affected by that view spreading. After all if we look back many “ECB Watchers” were telling us interest-rates would rise in 2019.

Whilst Bitcoin is priced in US Dollars and the explicit effect on it will be the fall in the US Treasury ten-year yield to 2% I also think that the emergence of this has had a strong impact.

GERMAN 10-YEAR BOND YIELD FALLS TO -0.330%, NEW RECORD LOW ( @DeltaOne)

For that we had to look all the way back to yesterday.

Oh and there is an odd link here because the countries which have cut interest-rates recently are the ones doing best in the cricket world cup.

The Libra Factor

The environment changed with this announcement from Facebook.

The mission for Libra is a simple global currency and financial infrastructure that empowers billions of people. Libra is made up of three parts that will work together to create a more inclusive financial system:

  1. It is built on a secure, scalable, and reliable blockchain;
  2. It is backed by a reserve of assets designed to give it intrinsic value;
  3. It is governed by the independent Libra Association tasked with evolving the ecosystem.

This shook things up in two main ways. Firstly in terms of psychology and awareness. Secondly that a big player in the online world was giving things a push. Of course, Facebook is not what it was ( if you have never seen the millennial job interview where she defines it as something her parents look at I recommend that you do….), but nonetheless it remains a significant player.

Back to the central banks

They have been quickly on the Libra case as this from Reuters highlights.

“A wider use of new types of crypto-assets for retail payment purposes would warrant close scrutiny by authorities to ensure that they are subject to high standards of regulation,” Quarles said ahead of a summit of Group of 20 countries in Japan this week.

Governor Carney of the Bank of England raised the topic at his Mansion House speech last week also.

As designed, Libra may substantially improve financial inclusion and dramatically lower the costs of
domestic and cross border payments.The Bank of England approaches Libra with an open mind but not an open door.

Much of that is public relations flim flam as a genuinely successful cryptocurrency would be like Kryptonite is to Superman for central banks. Not only would it challenge their monopoly over money it would further challenge the business model of “the precious” and frankly there is not much of it left as it is.

So they will be sitting in an ivory tower version of Mount Doom plotting to stop any version of their ring of power being thrown into the fire.

Comment

As we observe the situation we can learn a few lessons. For example I have seen some arguing that Bitcoin is a safe haven but that is only true on the rallies it has seen. In another form that relates to one of the functions of money which is to be a store of value. That is hard to argue if we look at the money chart below.

There are clear phases where it has destroyed value.

If we move to another function which is medium of exchange then the Libra plan offers clear hope for the future. Should Facebook push this then it could easily break new ground and get the cryptocurrency world into the ordinary persons life. Maybe it will help with it being a unit of account which is the area where most ground needs to be made.

So the outlook has brightened but there are two warning signs. Firstly the chart pattern and the bowl theory logic which suggests that the only way is not up. Next is the issue of past revolutions. For example the Victorians had a great success with railways leading to all sorts of things including proper timekeeping across the UK. But it is also true that many of the companies involved went bust.

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