Back in October, I wrote that Bitcoin was behaving like a Giffen Good – basically the higher the price, the more demand there was. Currently, Bitcoin and other cryptocurrencies are experiencing a decline in price from the highs, accompanied by dwindling interest.
In the short-run, price will be driven to a large degree by “adoption” and the “hope of adoption.”
When speculators believe that more people will adopt and trade Bitcoin (or other cryptocurrencies) the price has tended to rise. There was a great deal of hype surrounding the launch of Bitcoin futures – which quite frankly, haven’t lived up to expectations.
Open Interest on the CME front contract has been mired around 1,400 contracts for a month. The smaller CBOT contract, also seems to have stalled in terms of open interest across contracts. Daily trading volume has perked up a little in the past week, but only after a February that saw lower volumes than the prior month.
I see Bitcoin or Cryptocurrency ETFs or ETNs as being only an extremely remote possibility any time soon. The hopes that ETFs and ETNs would be launched helped drive prices higher. Not only did the SEC reject some applications, but given the relatively low volumes on the futures AND the recent controversy surrounding VIX Futures linked ETFs and ETNs, I think we are a long way off from seeing a Bitcoin or Crypto exchange traded product. Another impediment to adoption.
I also have to give full credit to the various crypto platforms – as far as I can tell, they have all made it easier to buy and hold cryptocurrencies. In theory this is good, because it makes it easier for investors to buy it. The reason I don’t think it is good in the near-term, is that without some catalyst, it just means that those who truly wanted to buy crypto could have found a way to do it, without futures or ETFs, so there isn’t an immediate new buyer base waiting to take advantage of these seemingly improved platforms.
Speaking of catalysts, most of the catalysts seem to be taking Bitcoin in the wrong direction
- Tax implications seem unhelpful to say the least, especially for those trading between multiple cryptocurrencies – this can be resolved but will cause some new buyers to potentially hold off
- The fact that some ads are being banned will potentially slow down the rate of adoption – though I suspect that poor price performance will have more of an impact than any lack of new ads
- The potential crackdown on Initial Coin Offerings (or ICO’s) seems problematic too. For those who were buying specific cryptocurrencies to participate in the nascent but exploding world of ICO’s – that desire might not be there.
So what could the catalyst be?
- Better, faster technologies that seem truly scalable? On one hand, things like Lightning seem to fit this, but it also sows some confusion for potential new investors as to whether any of the incumbents win or what the ‘limited supply’ really means
- Platforms that seamlessly integrate into an investors portfolio – including for taxes – could also help, though this seems to go against at least part of the point of crypto in the first place
- Higher prices – this goes back to the initial Giffen Good premise – that higher prices will force new investors to experiment, but while prices are going down, skeptics will be unlikely add to positions.
If crypto valuations are largely based on the anticipated rate of future adoption and any immediate windfalls (like ICOs that skyrocket), then I think we have more downside ahead of us for cryptocurrencies. It is also useful to remember, that this price decline from the highs for Bitcoin (and others) is occurring when many have the incentive to prop up prices with few legal or regularoty impediments to doing so – which makes me even more convinced that the current weakness is a trend that remains in place.
Disclaimer: Any opinions expressed are those of Peter Tchir. This info is for educational and/or entertainment purposes only, so use at your own risk. He’s not a broker-dealer or advisor of any kind.