Watching Stretched Markets for Signals By: Gabriel PotterMBA, AIFA® 2018.11.15

We’ve written about Bitcoin and its competitors before on this blog.   Perhaps some of you wonder why we pay attention to Bitcoin and their ilk, especially given our expressed belief that the current batch of crypto-currencies have been overblown by financial news.  While the underlying technology – block-chain – is extremely powerful and it suggests of a variety of exciting, valuable business propositions, crypto-currencies still lack the vetting, resilience, and security features necessary for widespread adoption. 

Wednesday the 14th, a news story crossed the wire pointing out Bitcoin (and many peers) had fallen to yearly lows.     There is a reason to pay attention to the plummeting values of Bitcoin beyond mere schadenfreude and narcissistic self-congratulation.  Bitcoin represents the bleeding edge of financial instruments.  Not in the sense of the technology - although the aforementioned block-chain technology is a novelty with lots of potential that has yet to be mined (pun intended) - but rather Bitcoin demonstrates the current edges of market optimism and trust.  After all, no currency or financial instrument has any value without mutually agreed upon terms and expectations of reciprocated trust. 

For context, after many years of relative obscurity where 1 Bitcoin traded under $1000, in late 2017 a speculative bubble formed around the currency.  At its top, 1 Bitcoin traded near $20,000 in December 2017.  The relatively late-adopters of Bitcoin in 2017 were not piling into the currency because they believed in the fundamentals of the currency or because of a libertarian ethos they wanted to advance.  Rather, they were speculators who believed that the soaring prices endemic to the stock market, housing market, and crypto-currencies markets.  They’d watched CNBC – got hyped – and bought in.  Once the investing markets experienced some minor turbulence throughout Q1, the potential for Bitcoin investors was sent crashing down, finally arriving at $6600 by April. 

After a few quarters of relative stability, a recent blast of uncertainty (caused by bifurcation of the adolescent currency into multiple versions) slammed into Bitcoin and virally spread to other crypto-currencies as well.  At the time of writing, 1 Bitcoin is $5450.  The equally important lesson regarding Bitcoin is not to consider what forces cause the occasional drop in value, but how the environment of enhanced uncertainty is preventing Bitcoin from reclaiming its 2017 highs, or even moderate advances, throughout the year.  Despite some bullish rallies in the market and occasional bouts of optimism, the currency has barely moved a whit.  The experiment in virtual currency is finally undergoing some skepticism.  Bitcoin advocates, and there are many, may applaud the price stability of through the middle of 2018 as a necessary step of sophistication.  But for traditional investors, the currency with transparency-problems and vague fundamentals instead becomes a proxy for interpreting market sentiment.  The movement in the currency reflects age-old human factors – greed & fear.  While price changes may sometime reflect changes in the marketplace, just as often it is a bellwether for investor sentiment.

 

 

 

 

Gabriel Potter

Gabriel is a Senior Investment Research Associate at Westminster Consulting, where he is responsible for designing strategic asset allocations and conducts proprietary market research.

An avid writer, Gabriel manages the firm’s blog and has been published in the Journal of Compensation and Benefits,...

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