Bitcoin valued at $20,000? What's really going on?
HOW is Bitcoin valued to reach $20,000? It isn't. No one can value it. It's valued at what speculators push its value to. It isn't ‘up' at that price and it hasn't ‘risen' to that price. Someone has simply paid that for it.
If you remember a column in 2008 where we showed you that oil and commodities were being speculated (betted on) and why we exited the market.
That, and this is speculation, and speculation doesn't always have integrity running through it, as we explained in June 2008. So where has the current ‘value' come from and is it likely to hold?
Much of the hype of such currencies is being driven by a small but influential group of traders who with the flick of a tweet can create supply and demand. I've seen it this morning with two sets of 50 per cent rises on two items I've been watching for some time. No reason … other than a tweet or post. Manipulation?
As for the current price: Let's consider your biggest risk as an investor – manipulation-through-speculation and vice versa.
Institutional investors (large investment companies) have flooded the market in preparation for future price movements – movements they can control.
Whilst investors believed that entry into the futures market on December 11 was a sign that coins were going to be a ‘serious' player, their confirmation bias is potentially clouding their logic.
The futures market allows for investors to take short (betting the price will go down) and long (betting it will go up) positions on anything by betting on the future price – a form of hedging.
If you own enough of the physical asset (the digital coin) you could easily separately sell and buy the bitcoins to create the most extraordinary swings and make money either way by betting on future price swings you are influencing.
This is especially true with any asset that is illiquid (hard to buy and sell speedily) and the swings are much more pronounced as you will have already seen.
The end outcome would be a private investor thrown around by rip currents and tides to be dumped naked on the beach at the end.
Do I have any evidence of that? The FT quotes Autonomous NEXT research, which counts 68 crypto hedge funds – 68, really.
The trouble is with such investments and products buying illiquid and high risk ‘assets' they need to lower their own risk or go broke. How?
Buying up the physical bitcoins to play the ‘hedging' game above would involve buying as early as possible to get your ‘average' price down over time to make money over the coming months and years.
By buying in long before the excitement, you hold colossal assets at a very cheap price, and of course by buying more, you create the designed market you want – a bubble you can inflate and deflate. You are timing your in and out of the market.
Is this the reason bitcoin has surged in the last few months?
So … looking at the first real clue from FACTIVA (as pointed out by the FT) that futures were to be listed, goes back to November 2016. Have a look at the graph which shows that as the lowest price point since then.
Certain other large institutions have downplayed bitcoin over the last year calling it a fraud and one could think they have helped keep that average price down.
Now you have a marketplace and a marketplace in the hands of people more clever than you and I.
I'm terrified that investors will see ‘coins' of any shape as an opportunity off the back of headlines. Don't do it.
Every coin has a white paper and read it carefully. Will an initial coin offering (ICO) even go to ICO? When can you exit and at what terms can you exit? If you do use a wallet, don't use one where the company keeps your key and use a hard wallet like Trezor. If you are looking to buy, you can do so through the likes of coinbase.
Coinmarketcap has a list of all 1,349 coins and there you can access enough data to kill a reasonably sized rhino.
:: Peter McGahan is the owner of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. Have a question on investments? Call Darren McKeever on 028 6863 2692, email firstname.lastname@example.org or visit www.wwfp.net.