Bitcoin Surges in Value Despite Bubble Warnings
William Heffernan
William Heffernan
Research Analyst

The cryptocurrency is pricing at $17,148.19* and has surged in value, rising 2,094% in a year, 3,572% over the last 2 years and 124,594% since 2013. It has generated innumerable headlines with each new high reached, and has experienced substantial volatility over the past month.

It is difficult to analyse Bitcoin as it does not have any fundamental value or drivers of price appreciation. There are a couple of factors that we think are at play. Firstly, the notion of cryptocurrencies has gained more legitimacy recently as several companies and financial institutions have begun to accept them as legal tender for goods and services. Secondly, the combined market cap of all digital currencies is still only $300bn. In comparison to other asset classes this is tiny (Real Estate $191tn, Bonds $94tn, Equities $55tn & Gold $6tn) which means that any small shift in flows, even by retail investors, has an inordinate impact on price. Just a 5% shift away from gold into cryptocurrencies could double their market-cap. Lastly, investors may have a sense of security thinking the supply of Bitcoin will forever be limited to 21 million bitcoins so the value can only appreciate higher as it gains legitimacy.

Can Bitcoin go higher?
Based on the above numbers, Bitcoin can of course move higher. But equally it could go lower. This month, CME group (a diverse derivatives marketplace) began trading Bitcoin futures. There has also been solid speculation regarding the possible launch of Bitcoin ETFs, all of which should drive fund flows higher. However, as this happens it means Bitcoin investing will move more into the sphere of a regulated entity and analysts will be able to better ascertain its true value, if there is one. This means that Bitcoin may suffer as a result of becoming more mainstream.

The other major argument is that Bitcoin represents a structural shift in how markets and finance work. It will remove the need for financial institutions and allow people to engage in peer-to-peer transactions without the need for a middle man. This may be true in the longer term and indeed some very large, reputable financial institutions have started to seriously look at and invest in cryptocurrencies. However, this is a much longer term investment argument which should surely happen under the auspices of government and regulators. This would likely cause Bitcoin to re-set to a more reasonable estimate of valuation. The more attention it attracts from regulators and Wall Street institutions, the more of its original attractive qualities (lack of regulation, independence etc.) it loses.

We took a look at Cryptocurrencies & Financial Euphoria back in September, and Bitcoin as the largest cryptocurrency in the market. As it stands, Bitcoin cannot yet be analysed from a fundamental investment perspective. We do not recommend buying or shorting Bitcoin considering its recent rally and its daily price swings. We will however watch this space for further developments.

* All data as of 11th December 2017. Please note that this article is for information purposes only. It is not intended to and does not constitute personal recommendations/investment advice.

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