Interactive Investor

Bitcoin storms to new all-time high

13th October 2017 17:15

Gary McFarlane from interactive investor

Bitcoin has stormed past near-term resistance to trade at an all-time high of $5,800, as bullish sentiment around the currency takes hold. The price run up follows the China-induced correction in September on news of exchange closures.

But the Chinese move has not stopped trading by Chinese bitcoin investors because they have migrated to peer-to-peer over-the-counter services, which have not been banned. Russia's central bank added to the regulatory risks by announcing on Tuesday its intention to ban cryptocurrency exchanges, but market participants remain unperturbed.

The fact that bitcoin has been able to weather these government interventions is being taken as evidence of the robustness of bitcoin design as a decentralised currency immune to the attempts of national jurisdictions to undermine it. Iqbal Gandham, managing director at eToro UK, the social trading platform, is not surprised by the price bounce, commenting that "bitcoin was designed to operate outside the influence of governments and central banks and is doing exactly that".

He thinks the price spike will lead to more talk of bubbles but thinks "these calls on bubble territory are coming far too early in the story for bitcoin" and still holds to the view that "this is just the beginning for bitcoin". Looking to the future, he believes "the price of bitcoin will need to be significantly higher than $5,000" to fulfil its role as a means of exchange.

"Most are unaware that in future people will not spend a single bitcoin. Instead people would spend the underlying tokens, called satoshis, in the same way we spend coins and not a bar of gold. A single satoshi is only worth $0.00005 currently," says Gandham.

One satoshi is ฿0.00000001 or to put it another way, a bitcoin can be split into 100 million units. However, just because a higher value is required for the currency to be widely adopted as a mainstream means of exchange, it doesn't follow that this will necessarily happen.

Bitcoin is today used much more as a store of value, i.e. speculative investment, than it is as a means of exchange.

Nevertheless, attempts persist to put a value on bitcoin, and one measure called the ratio of network value to transactions (NVT) is growing in popularity. NVT is calculated by dividing market capitalisation (bitcoin price x the number of bitcoin) by the US dollar volume transmitted over the network.

Bitcoin's NVT currently stands at 10.85 and reached a high to date in August 2014 of 37.65. The higher the figure the more overvalued the currency might be considered to be or, alternatively, investors are valuing it for future high growth. Judged by the NVT metric, the price may well have much further to go, although it's not quite as simple as that.

The NVT is being touted as bitcoin's version of the price/earnings ratio used to value equities, but whereas company earnings can be measured relatively unproblematically, this is not the same where bitcoin network activity is concerned, or rather in interpreting network activity data. This is because it is difficult to ascertain how many transactions are related to speculative trading and exchanges doing business between themselves, as opposed to transactions to buy goods and services from merchants.

Also, the more successful bitcoin is as a store of value the less likely it is to become a means of exchange because people will hoard their bitcoin in the expectation of yet higher prices to come.

Other price drivers for bitcoin came from reports that Goldman Sachs is setting up a trading desk for cryptocurrencies and the imminent launch of Bitcoin Gold, a new coin that all holders of bitcoin will receive in proportionate number, effectively creating free money.

With the Chinese Communist Party Congress opening on 18 October, industry watchers expect it to be followed by further announcements regarding the regulatory landscape for digital currencies in the country, which could be positive for crypto prices.

Another factor behind the price appreciation is that while bitcoin has been rising the hundreds of altcoins trading on exchanges have been falling. This can take on a self-reinforcing dynamic because sales of altcoins often implies a bid for bitcoin or Ethereum, in the same way that selling assets priced in dollars boosts the value of the dollar.

Countering that, there may be heightened turbulence as the SegWit2x hard fork in the bitcoin code approaches on or around 18 November. The change is being made to speed up transactions on the bitcoin network and reduce fees.

Bitcoin has traded as low as $5,172 and as high as $5,854 on the Kraken exchange in the past 24 hours, and at the time of writing is priced at $5,625, up 3.4%. Ethereum has risen 14% to $347 in the same period, according to the Coindesk price index. The blockchain platform has its own code tweaks coming up and the price appreciation of ether in recent days suggests confidence that there will be no problems on Sunday when the changes are implemented.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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