Are the Experts Confused about Bitcoin?

We recently wrote about cryptocurrency users flocking to bitcoin and then about how bitcoin took a tumble.

And why else are people flocking to bitcoin? The Chinese stock market is no longer on an upward tear and many who made money speculating in the Shanghai and Shenzhen stock markets are looking to make a killing in bitcoin. Unfortunately, what goes up can come down. In that sense people may be smart to be getting out of more risky and volatile digital currencies but bitcoin itself is volatile.

The problem with bitcoin is that all of the signals for trading are technical. There is no set of fundamentals for bitcoin. In regard to pricing even the experts are confused about bitcoin. Bloomberg writes about bitcoin’s valuation and how currency analysts are confused.

Bitcoin is gold for millennials. Or maybe it’s that generation’s fine wine and collectible art. Or just a bubble waiting to burst.

For foreign-exchange analysts trying to use traditional methods to value the so-called cryptocurrency and its digital cousins, it may be all of the above — but it’s not quite a currency.

“It is difficult to use standard FX valuation frameworks that are based on the fundamental drivers of the currency, like relative productivity, or terms of trade of the country, because there are no such concepts,” said Juan Prada, a New York-based currency strategist at Barclays Capital Inc.

Is bitcoin a currency or a commodity?

“Both gold and bitcoin are different from usual currencies in the sense that there is not a single economic entity that uses it as a medium of exchange and unit of account,” Prada said.

That aligns with the view of the U.S. Commodity Futures Trading Commission, which in September 2015 said that bitcoin and other virtual currencies were officially considered commodities. By saying so, the CFTC was able to assert its authority to provide oversight of the trading of cryptocurrency futures and options in the future.

Because there is no fundamental basis by which to value bitcoins they are like tulip bulbs in Holland centuries ago when a single bulb was worth what would be thousands of dollars today. The comparisons to fine art and precious metals are also valid. Thus in order to trade bitcoins one probably needs to keep exposure short and when options are available to use them to mitigate risk. The biggest risk is for people who are using bitcoin as a safe haven against the risks of other currencies. Doing so is not rational but no one ever said that everyone in the trading world is rational.

Ready to Self-Destruct?

Forbes writes that Bitcoin is about to self-destruct. The rationale behind buying and selling bitcoins is to make money or often to hide money. The value of the digital currency is driven by the number of people who believe that they will be successful in making or hiding money. If and when attainment of those goals is seen as an illusion the bitcoin market will come crashing back to some level supported by its use in commercial transactions.