The Bitcoin price surge has been epic in the history of markets. After punching in the new year near $899, the cryptocurrency has climbed a wall of naysayers and is now trading above $12,000 for the first time in its history. While how, exactly, the price is rationalized is unclear but a quick Bitcoin price check notes it’s near $11,700. This dramatic appreciation comes even as the definition of the investment as a “currency” or a “store of value” remains undetermined. What is clear, however, is that interest has been growing in dramatic fashion.
Bitcoin price check: Value nearly doubles in just over a month after CBOE, CMEGroup offer futures
Throughout the year, Bitcoin had generally steadily risen in value, creating a chart pattern that would be a trend follower’s dream: steady uptrend without downside deviation that would cause risk management stops to be executed.
ValueWalk's Raul Panganiban interviews Dr. Kathryn Kaminski, Chief Research Strategist at AlphaSimplex, and discuss her approach to investing and the trends she is seeing in regards to quant investing and hedge funds. Q1 2021 hedge fund letters, conferences and more The following is a computer generated transcript and may contain some errors. Interview with AlphaSimplex's Read More
The trend has had its detractors, of course.
Most prominently benchmarking the disdain for the investment was JPMorgan Chairman and CEO Jamie Dimon, who called it a “fraud.” On September 12 he warned that a bank trader could lose their job “in a second” for trading bitcoin. Later in October, he would add to the disdain. “If you’re stupid enough to buy it, you’ll pay the price for it one day,” he told an audience at the Institute of International Finance conference on Friday, October 13. “The only value of bitcoin is what the other guy will pay for it.”
At that point, Bitcoin was trading near $6,000. Before the end of the month, however, something would change.
When the CMEGroup, the world’s largest derivatives exchange operator, revealed on October 31 it was going to offer Bitcoin futures, the announcement was treated with a strong degree of institutional interest, particularly following an announcement by CBOE Global Markets that they, too, would be offering Bitcoin derivatives.
“Move over, PayPal, and bye-bye credit cards, the financial world is changing,” the New York Post’s Jonathon Trugman wrote. “Square and the CME are just the beginning of the next wave.”
With the latest Bitcoin price check showing $12,000 mark a little over 30 days later, the question becomes: what happens next?
Bitcoin price check: JPMorgan analyst now points to Bitcoin as “emerging asset class”
The attitude at JPMorgan appears to be changing. Analyst Nikolaos Panigirtzoglou, apparently not fearing for the loss of his job, said recognition by the CMEGroup and CBOE “has the potential to elevate cryptocurrencies to an emerging asset class.”
TABB Group’s Thomas Lehrkinder expects the Bitcoin market to grow past $300 billion, and he is keeping a close eye on open interest figures posted by the CBOE, CMEGroup as well as NASDAQ and Cantor Fitzgerald, both of whom recently entered the Bitcoin derivatives exchange markets.
“When it comes to risk, the cryptocurrency space is the new poster child,” Lehrkinder wrote in a December report titled “Bitcoin Futures Tale of the Tape.” Ultimately traders are caught in a Bitcoin price check they find irresistible. “The mercurial rise in price of bitcoin has caught the eyes of most traders and has provided an avenue for some much-needed volatility. The talk of a bitcoin bubble, coupled with banking leaders calling the product a fraud, has only added to the frenzy.”
A key point or bump in the road for the Bitcoin exchanges might be found in the market making methodology. Traditionally when making markets in listed derivatives or over the counter bank derivatives contracts, those making the market have an ability to hedge their market exposure.
“Market makers may find difficulty laying off their risk in the cash market, as the cash market is somewhat immature and the price fluctuations are atypical,” Lehrkinder noted, pointing to the CMEGroup providing an incentive program to those making a market in Bitcoin, a common tactic to encourage initial trading volume.
In addition to market making issues, the addition of NASDAQ and Cantor Fitzgerald to the exchange mix might dilute liquidity. “The Cboe and CME are two exchanges with the cachet and experience to launch a successful product,” Lehrkinder pointed out. “The addition of Nasdaq and Cantor Fitzgerald to the mix in a few months may dilute the critical mass needed to anoint a dominant player – which may be OK, since there are so many cryptocurrencies to go around.”
Bitcoin price check: Will Jamie Dimon ultimately be proven correct?
But elevating the asset class might involve government, which has the potential to create its own cryptocurrency using Blockchain technology that underlies Bitcoin and offers significantly “smarter” technology behind the ability to settle contracts and transfer wealth around the globe.
And it is here that Dimon’s wisdom may be proven correct to various degrees, as he stated back in October:
The other thing I’ve always [said] about bitcoin, governments — and this is not a technological statement — governments are going to crush it one day. Governments like to know where the money is, who has it and what you’re doing with it, in case you haven’t noticed. Right?
And governments like to control their currency, like to control their own economy. So China’s already put curbs on it. Japan, they say Japan accepted bitcoin. No they didn’t. What I gather Japan did was they call it J-coin. It’s a yen cryptocurrency. It’s not a non-fiat [digital currency].
The political system, with a particular eye on central banks, has the opportunity to either extend or crush the Bitcoin trend. As the world increasingly moves to a cashless society, it could be central banks that ultimately think they like the technology behind Bitcoin – perhaps too much for trader’s liking. They may determine that their own cryptocurrency, with the backing of something tangible through an organized regulatory structure, is more appropriate and create their own version of Bitcoin.
There is also a growing short interest in Bitcoin growing among hedge fund managers, Bloomberg reported.
Until a market correction occurs, however, the Bitcoin bubble is rolling along in an odd fashion to the quantitatively driven stock market itself: until proven otherwise, the market is headed higher. With the jinx of a recent Barron’s cover noting that “Bitcoin Storms Wall Street,” the mantra appears as though the trend is your friend – until it isn’t.