by Shai Heffetz, Managing Director of InterTrader Ltd
If you had bought $100 worth of Bitcoin in July 2010 your investment would now be worth over $4 million. But many people still approach the digital cryptocurrency with caution. So, as a trader, what’s a sensible attitude to take to Bitcoin?
In today’s world, all international currencies are controlled by central banks as tools to manage inflation. Bitcoin offers an alternative to this model. Now the technology has matured, Bitcoin has emerged as an asset class in its own right which is independent of the government-centralised approach.
The blockchain technology which supports Bitcoin is not centrally controlled, and no one entity has the power to decide how many units of the currency are to be created. No one can determine the value of each Bitcoin unit, aside from the free market.
Since the US dropped the gold standard, the value of international currencies lies simply in the perception of value. And Bitcoin is no different. Just as the price of Bitcoin has soared from 2010 to the present day, so can it go to zero if people stop believing in Bitcoin’s value.
An historically volatile market
This accounts for the exceptional volatility in the market for Bitcoin. The value of Bitcoin broke through $2000 in May this year, and is fast closing on $3000, but during this run we have seen several sudden drops as the future of the cryptocurrency has been called into doubt.
For instance, the price fell sharply in 2014 over fears that China would prohibit the use of Bitcoin. Conversely, at times of economic stability such as the Cypriot financial crisis of 2012-2013, many investors felt they were safer converting their funds into Bitcoin, causing a rise in value.
Ultimately the strength of any currency lies in the collective belief that the currency holds value. And, regardless of whether you think the price will go up or down, Bitcoin is now a very interesting asset class.
At InterTrader we enable you to take either side. If you think the Bitcoin bubble is set to burst you can go short. Or if you agree with some estimates that the price could continue to soar towards $10,000 you can go long.
The dark side of Bitcoin?
Bitcoin has had a reputation problem in the past. The perceived lack of traceability has encouraged some to use Bitcoin for criminal transactions on the dark web. This reputation has steadily been dispelled, however, as the computer scientists behind Bitcoin have worked with law enforcement agencies to achieve significant criminal convictions.
Several factors have contributed to Bitcoin’s shift to the mainstream:
- The understanding that this is not a flash in the pan. Bitcoin is not going away.
- The inherent value in the Bitcoin technology itself.
- The ability to trade only with verified individuals has increased the legitimacy of Bitcoin transactions.
- Regulators are no longer reluctant to touch Bitcoin. Instead they are now working out the best ways to regulate the currency.
So are there risks with trading Bitcoin? Yes. Any disruptive technology carries a high risk, and volatile markets increase both your risk and your potential reward. This may deter you from making Bitcoin a main investment, but that’s not to say it can’t form part of a balanced trading portfolio.
With spread betting and CFD trading on Bitcoin you can take a view without having to create a Bitcoin wallet or deal with a Bitcoin exchange. You can speculate on the value of Bitcoin without actually holding any Bitcoin.
The future for Bitcoin
The daily volatility of Bitcoin is up to 10 times that of the major forex pairs. While this may offer an opportunity for speculation, these wild swings in value may deter people from using Bitcoin for transactions and investment.
Will Bitcoin become widely adopted in the UK and US? Maybe not. But in China and Africa the situation is different. Anywhere that local currencies are seen as manipulated and unreliable, Bitcoin could be regarded as a significant, convenient alternative.
In Europe and the US we have become accustomed to the ease of online banking, but the rest of the world is not so fortunate. With Bitcoin you bypass banks and save transactional costs. So, if you lack confidence in your local currency or banking system, Bitcoin may potentially be a better way to store the value of your capital.
Ultimately, the survival of Bitcoin depends on addressing this weakness in the global banking system. And so long as Bitcoin survives, the changing value of the cryptocurrency will offer an opportunity for speculation.
Managing Director, InterTrader Ltd
The content of this article is the personal opinion of the author and not InterTrader. You should under no circumstances consider the information and comments provided as an offer or solicitation to invest. This is not investment advice. The information provided is believed to be accurate at the date the information is produced.