Bitcoin Is Hot Again . . . But For How Long

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Bitcoin Is Hot Again . . .  But For How Long

Cryptocurrencies enjoyed a brief moment in the limelight upon their introduction, even as they promised a new universal payment method for online monetary interactions – with Bitcoin leading the way.

Quickly, however, the downside to non-government affiliated currencies became more than apparent. They were unregulated and, therefore, dangerous in more ways than one.

Bitcoin lost their footing at the close of 2013 when its market price hit $1,147 on November 29. Not only were users losing interest, but so were investors. After the fall, prices languished for many months in the $200-$300 range.

But Bitcoin is back – and this time it is resurfacing without all the fanfare and hype of the first go around.

The price of the digital currency is now trading above $750, which puts Bitcoin at a two-year high and up about $500 over the past year.

The question remains: Why the sudden resurgence in price?

The Halving

Some in the Bitcoin community are pointing to an unusual event called “the halving.”

This is an adjustment to Bitcoin’s protocol that controls the creation of new coins.

When Bitcoin was created, a “cap” was established – the creators of the cryptocurrency originally determined that no more than 21 million bitcoins would ever be mined. To date, about 15.7 million coins have hit the market.

As part of the control process, the mining reward is to be halved every four years.

At launch, the reward was 50 coins. In 2012, that was cut to 25 coins and now on July 10, that will be cut in half, again, to 12.5 coins.

When these halvings occur, the old law of supply and demand kicks in. Less supply meeting the same demand translates to higher prices.

But in today’s financial market, investors have to be ahead of the game. So, many people have been front-running the “halving” and, subsequently, prices are skyrocketing.

Chinese Speculators

Another reason for this Bitcoin resurgence will be familiar to anyone that follows modern financial trends – Chinese speculators.

On May 30, the Wall Street Journal reported that two Chinese Bitcoin exchanges – OKCoin and Huobi – account for roughly 92% of global trading in the cryptocurrency. This is surprising considering the Chinese are paying about a 7% premium on Bitcoin, compared to the rest of the world.

And all of this in spite of Chinese government efforts to curb trading in Bitcoin.

Huobi’s Chief Marketing Officer, Du Jin, told the WSJ: “There’s a lot of hot money in China that has to go somewhere.”

The danger here is that the Chinese speculators will soon find some other outlet for their get-rich-quick mentality and start dumping Bitcoins just as quickly as they picked them up.

A Cryptic Investment

How can investors who are not interested in actually buying Bitcoins, themselves, put money into this renaissance of the cryptocurrency?

With bitcoin ETFs still in Securities and Exchange Commission (SEC) limbo, there is only one alternative at the moment: the Bitcoin Investment Trust (GBTC) from Grayscale Investments.

The Bitcoin Investment Trust trades on the over-the counter market (OTCQX) and can be bought through any broker.

But I highly recommend that investors stay away.

Why? Because the speculators have gone wild! As of June 17, the trust traded for $135 a share. Yet, the value of the Bitcoins it owns – its net asset value – is only $70.39. That’s an almost 100% premium!

Of course, GBTC could go higher. But that’s dangerous territory, with investors challenging one another to reveal who is the “greater fool.”

Personally, I’ll wait until the SEC does approve an ETF or ETN before considering investing in Bitcoin. Even then, it’s a matter of reading the cryptocurrency trend market just right.

Good investing,

Tim Maverick

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By Tim Maverick