A 38% Leap for Bitcoin: The Start of Another Bubble?

If you keep tabs on bitcoin or have had some loose coins rattling about in your digital wallet, then you’d have been pleased to see that cryptocurrencies are enjoying a resurgence.

For the past four months or so, the price has languished around $6,000 per coin.

Then on 2 April, the price jumped a thousand bucks…and since then, bitcoin has made the peppy step to almost $8,000 per coin.

We’re talking about a 30%+ gain in less than a week.

But here’s the problem — there’s no distinguishable reason why.

Sure, the market’s tanking…here in New Zealand and overseas…

Sure, investors are scared and looking for safe havens…

But that doesn’t explain a sudden run-up of 15% or more!

It’d make a lot more sense if it was a gradual incline…like how we saw the Treasury yield curve slowly start to flatten over the past six months.

Instead, we went to lunch on Tuesday and came back 15% richer.

Best lunch ever.

And it brings the one-month total gain for bitcoin up to a sweet 38% at the time of writing.

Now, it doesn’t matter which side of the crypto aisle you sit. Something like this has to make you sit back and say, ‘Huh?

There are two main theories floating around the web-sphere:

  1. That a ‘mystery buyer’ bought $100 million worth of bitcoin on various platforms.
  2. Trading bots (as common with cryptos as with normal stocks) got worked up in a frenzy.

Reuters suggests a bit of both:

Bitcoin soared to its highest in almost five months on Tuesday, pulling smaller cryptocurrencies up with it, after a major order by an anonymous buyer set off a frenzy of computer-driven trading…

The truth is that someone purchased 20,000 bitcoins using an algorithmically-managed order, synchronised across three separate exchanges: Coinbase, Kraken, and Bitstamp.

And that big order triggered the sleeping army of trading bots who have been hibernating since 2017.

Bada-bing, bada-boom! You’re 38% wealthier!

Of course, that’s not really how it works, is it? [openx slug=inpost]

If anything, that’s how a bubble works…and yes, I’m suggesting that today’s flourishing bitcoin price is a bubble. It’s hard for me to say…as a true believe in the coins and what they’ll do for tomorrow’s world.

But the fact is — this price surge was unwarranted.

It started in a moment by a single buyer…and swelled by the subsequent flutter of pre-programmed buyer bots.

There was no big breakthrough in the technology…no change in regulation…no big names coming on board…no sudden macro activity.

There was no good reason for it.

Just hype and frenzy — the two secret ingredients to a good old-fashioned investment bubble.

In fact, let’s go on a trip with the Ghost of Christmas Past.

Back to October of 2017…when bitcoin was at about the same price it is today.

The mainstream hadn’t yet gotten their claws into the idea…or simply didn’t understand it. Word was spreading…and the technology looked promising.

At the time, lots of investors were sitting on multi-thousand percent gains on their bitcoin…so there was no lack of anecdotal success stories.

However, the excitement lacked any real-world grounding…no breakthroughs…no economic shifts…no real reason to grow.

It was the perfect storm for a bubble.

But when the bubble showed its face in the weeks that followed, it was steeper and more terrifying than anyone had predicted.

$8,000 coins turned into $15,000. Then $20,000. Then $25,000.

Finally scraping the $28,000 ceiling in the week before Christmas.

It was almost too good to be true.

Then, like a cheap lolly cake, it rotted and fell apart in the months that followed…zigzagging down to about $3,500 per coin a year later.

Bada-bing…bada-BOOM.

And that brings us back to day…feeling cheery about a $2,000 jump…with more investors jumping on the bandwagon every day.

Did the Ghost of Christmas Past teach us nothing? Are we falling right back into the same cliff-destined rut?

Yes and no.

Today’s price surge is almost certainly a bubble, like the runt sibling of who we met back in Christmas 2017. With no real reason as to why, it’s hard to see it as anything else.

Will it tumble? Probably…once the trading bot programmers slap their bots on the wrist and update their code.

But is bitcoin destined for a future of wallowing in despair, a pariah of the investing world? Probably not…

You see, the ideas behind bitcoin — blockchain, smart contracts, tokens, etc. — still hold potential. They continue to be developed and polished…finding their niche places in today’s society.

In other words, there’s something to it.

And I believe that something will slowly evolve into a massive industry…and this blip will be looked back at simply as ‘growing pains’.

But we’re not there yet…

And in the meantime, bitcoin believers will have to endure the run-ups…and subsequent sags…of emotion and bot-fuelled bubbles.

I’m holding fast…

Best,

Taylor Kee
Editor, Money Morning New Zealand


Taylor Kee is the lead Editor at Money Morning NZ. With a background in the financial publishing industry, Taylor knows how simple, yet difficult investing can be. He has worked with a range of assets classes, and with some of the world’s most thought-provoking financial writers, including Bill Bonner, Dan Denning, Doug Casey, and more. But he’s found his niche in macroeconomics and the excitement of technology investments. And Taylor is looking forward to the opportunity to share his thoughts on where New Zealand’s economy is going next and the opportunities it presents. Taylor shares these ideas with Money Morning NZ readers each day.


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