July 31, 2016

Invest in Bitcoin?

It is clearly he front runner among all the various cryptocurrencies and has steadily consolidated its presence. As more people invest it bitcoin, it is reflected in the increased trading volumes across the exchanges around the world. With more investors taking it seriously and using it as portfolio diversification tool, Bitcoin has proven to be a reliable channel for temporary hedging. Owing to these characteristics, it is being considered as digital gold since its supply is also limited. As we have an estimate of when its production comes to a halt, long term investments in Bitcoin are feasible. Based on historical data and trade driven analysis, here are a few scenarios where mid to long term investments in Bitcoin might be a good idea:

Governments working towards adopting Bitcoin:

Any news which promotes the adoption of Bitcoin, especially by the Government strengthens the positive sentiment towards it, more people decide to invest in bitcoin. When Silk Road was closed and bitcoins were seized, the currency came under a negative light. But when the US Senate held a hearing in the later part of 2013, under the title “Beyond Silk Road: Potential Risks, Threats, and Promises of Virtual Currencies” and many senators came to consensus that Bitcoin holds great promise, the trading price of Bitcoin boosted remarkably ( $685-$1072 in 10 days).

Later in 2015 New York State Department of Financial Services released a set of customized rules. These were meant to regulate Bitcoin and digital currency businesses. They were the first ever set of rules directly targeted at digital currency businesses. There was a significant rallying in price which shows how positive, their adoption is for the market sentiment.

Major firms adopting Bitcoin as a payment method:

When mainstream companies adopt Bitcoin as a payment method, more people invest in bitcoin and it has a positive impact on prices. These opportunities would be ideal for mid-term trades. This is owing to the fact that something as nascent as Bitcoin has found roots in the existing system which strengthens its credibility and onsets positive sentiment. This was clearly observed when companies like Microsoft, Dell, Paypal and Overstock.com embedded Bitcoin in their payment systems.

Launch of new Bitcoin exchanges:

Whenever a reputed firm in the Bitcoin world undergoes change, it will have implications on trading prices. The launch of new Bitcoin exchanges or structural expansion of wallet companies or blockchain technology companies into newer areas is always a positive sentiment marker which encourages more people to invest in bitcoin. (Coinbase and Gemini exchanges are good examples). Depending on the sheer volume of the change or launch, mid or long term investments can be planned.

Global acceptance or macroeconomic factors:

In early 2013 when People’s Bank of China accepted Bitcoin, new trading volume started flowing in. The price of a bitcoin shot up by $ 400 in a span of 10 days and the market went berserk. A similar sentiment was observed when EU declared that there would be no VAT (Value Added Tax) on Bitcoin Trades.

Though China took a negative stance on Bitcoin, increased volumes in Bitcoin trading while Yuan was devaluated were observed. Major global events where people look at Bitcoin as a hedging option, always drive up its trading prices. This makes these events ideal scenarios for investing.

Basing on these factors and clever entry positions, one can plan profitable investments in Bitcoin that are assured to give good returns.

Bitcoin Safe Haven

Global markets are always affected by macroeconomic issues that majorly impact a particular country or region. Many a times, mere speculation about an impending event causes volatility and moves the markets significantly. Whenever this happens, investors scurry to find a safe haven so as to move their investments and shield themselves from the negative impact of the event. Traditionally, gold has been the safe haven whenever there was a massive shift in the trading prices. But this bubble was burst with the ‘Oil Slump’ of 2014, where the fall in oil prices affected other commodities. Gold and other precious metals marked historic lows and the market participants were left with limited options to safeguard their assets.

The introduction of crypto-currencies and their increasing trading volumes (especially Bitcoin), caught the eyes of many investors. They proceeded to diversify their portfolios using Bitcoin as a major instrument. This could be substantiated from the trading prices of Bitcoin during the oil slump which experienced a short term boost. This happened time and again when there was an imminent threat to any economy which could have an impact globally. Let us look at five such instances when Bitcoin was looked at as a good stand in investment.

Greek Crisis:

There was heavy speculation around Greece facing a possible exit from Eurozone by defaulting on its debt obligations. This created tension in the European Commodities market which had been seeing a sharp drop in prices accompanied by strong trading volume. When the Greek economy was collapsing there was a rise in the price of Bitcoin. This was majorly attributed to the increase in volumes. It came on account of those Greek users who were shut out of their bank accounts and were hence driven to use the digital currency. But later when the situation became dire, there was a sharp drop in the trading price of commodities. During this period, Bitcoin price moved up the ladder with good trading volume. This was attributed to investors moving their funds into Bitcoin to hedge against drastic price drops in commodities.

Russian Ruble drop:

The economy of Russia was majorly impacted because of the oil slump leading to a sharp dip of Russian Ruble. The general population swapped currency for products to hold the value. However, the investors decided to trade heavily in Bitcoin to temporarily hold till their currency gets a strong footing again. This was observed in the drastic increase of trades on the Bulgaria based cryptocurrency BTC-e.

Scottish Independence Referendum:

Though the Scots voted against leaving the United Kingdom, the speculation surrounding the event drove the trading prices of pound low. During this period, there was a significant increase in the trading price of Bitcoin. This was fueled by the fact that Bitcoin was being looked up to as an alternate for British Pound in the event Scotland votes for Independence.

Yuan Devaluation:

Bitcoin marked a two year high in June 2016 owing to the devaluation of the Yuan in China. While the devaluation impacted the global economy adversely, the rise in the price of Bitcoin was attributed to heavy investments being shifted towards it.

UK leaving European Union: ‘Brexit’

With speculation around UK leaving the European Union, there was high volatility in the price of Bitcoin. But the volatility was observed to be in an upward trend. This is made it clear that the market players are moving their funds into Bitcoin to avoid the repercussions of the Brexit. This can be observed from the low volumes in the European trading platforms and increased volumes in the Bitcoin platforms.

Hence it is indeed true that Bitcoin can in fact be the safe haven at least for short duration. Chris Burniske, a block chain analyst and products lead at investment manager ARK Invest opines:

“Bitcoin[and Gold] shares those same characteristics: Both have an extremely limited supply and a relatively inert state. While gold has had a bit of a run in 2016, over the last five year period it’s been a terrible performing asset. So you’ve got people starting to wonder where there are safe havens to store their assets. I think you have lot of people saying ‘Hey we want to diversify a little bit’ making allocations to bitcoin’.”

Hence Bitcoin can in fact be termed as ‘Digital Gold’.

Day: July 31, 2016

Invest in Bitcoin : Look out for the right signs