Why bitcoin surged
Bitcoin is down 18% since this time last week.
As for some of the smaller cryptocurrencies, it’s a case of “Look away now…”
With, Dogecoin, for example, the drop is closer to 40%.
As ever, the big thing to keep in mind with cryptos is that they’re volatile. Very volatile.
Another is that there’s a good chance the crypto you buy will end up being worth zero. Especially if it’s one of the lesser-known ones.
Anyone yelling at you that “This thing is definitely the future, pile in now, don’t ask questions!” is someone you can safely put on mute.
Indeed, today I thought I’d pour a bit of cold water on the whole thing. Call it “balance”, call it robust analytical process, or just blame it on this being Monday and my back is playing up.
Before that, though, I may as well spoil the conclusion and say I still suggest making a small allocation to crypto.
My recent emails, including the one this morning, still stand.
So, then. Where’s that cold water?
Well, as I wrote last week, the “Buy Bitcoin” sign that someone held up behind Janet Yellen last week does feel like the ringing of a bell at the top of the market.
That’s not a very scientific way of looking at things, I grant you. But these kind of signals do have an eerie habit of popping up when market fevers are about to break.
Throwing some actual facts into the mix, it’s interesting that bitcoin’s recent run-up coincided with two factors that may turn out to have only a transient effect on its price.
On 1 April, a new law came into force in Japan, where bitcoin is now officially a legal method of payment.
Bitcoin was priced at $1,073 that day. That was actually a bit lower than it had been at some points in January.
Then the price surge began.
From $1,073 on 1 April, bitcoin was up to $1,184 a week later. By the end of that month it was at $1,325.
And then it really started moving. The price hit $2,714 on 25 May, and in June it briefly touched $3,000.
Many credit (or blame, depending on your point of view) the surge of investment from yield-starved private investors in Japan.
And it’s likely that the weight of money coming from Japanese investors, coupled with the hype the new law generated, had an impact on the price.
However, it wasn’t the only thing going on at the time.
In May we had the WannaCry ransomware attack. June brought another similar attack, this one dubbed Petya. Both were global in scale.
These ransomware attacks encrypt a computer’s files and demand payment to unlock them. And they demand the ransom in bitcoin because of its anonymous (technically pseudonymous) quality.
So in April you had Japanese investors piling in… then in May and June you had cybercriminals demanding people and corporations go and buy bitcoin to pay their ransoms.
So two questions immediately spring to mind…
How much of the recent crypto surge was down to these factors?
And will they turn out to have been one-offs?
To the first, market moves often (though by no means always) require a catalyst. These candidates look as good as any as far as I can see.
To the second question, it’s hard to say. Will there be other cyberattacks? Almost certainly.
Will that lead to some kind of legislative backlash against crypto that’s detrimental to investors in the space?
It’s possible. It’s also possible that other countries will decide to follow Japan’s lead and bitcoin smashes through the $3,000 mark.
It’s in the nature of investing in something new that you’re a pioneer. And pioneers don’t know the territory they’re mapping.
Ahead may be sunlit uplands or a perilous ravine. We must wait until we get there.
If that’s not enough cold water for you, then check out this blog post I read last night.
At this point you may be thinking “Stuff it. This whole thing is weird and sounds like a load of horse manure.”
And it may well be. The beauty of investing is that we don’t have to know. That’s why we have portfolios.
We take a position on something that could happen, rather than obsess over what we definitely know will or won’t happen (that should always be a short conversation with ourselves; we really know very little).
And I can tell you now, from personal contacts I speak to regularly, that Big Finance is all over crypto. They’re all over fintech in general, actually, because they don’t want the future to happen without them.
As an example to back this up, here’s a patent filing from Goldman Sachs for a cryptocurrency settlement system.
It’s from a few years ago, but it shows that there’s serious interest in crypto from the biggest names in finance.
You don’t have to “believe” in crypto to make money from it. This isn’t joining a cult (even though some of crypto’s adherents make it feel like that).
You don’t have to plough your life savings into it (in fact, you really, really shouldn’t in my view).
As I quoted our crypto expert John on Friday: “Any money you put into cryptos for the very first time should be money that you’d be prepared to put on a horse in the Grand National”.
And as with betting on a horse, you could be kissing bye-bye to what you put in.
Or you could win big. Perhaps very big.