In early January, Bitcoin came within a whisker of topping
its all-time high of $1,165.89, reached on November 30, 2013.
Then it promptly fell off a cliff, plunging by 29 percent
between January 4 and January 6, following warnings issued last
week by the Chinese central bank to the countrys three
largest Bitcoin exchanges.
Where the price will finally stabilize remains an open
question, as far as investors, traders and players in the
market are concerned. For institutions and hedge funds that
invest in alternative assets, the potential advantage that Bitcoin can diversify risk
may be offset by such high levels of volatility.
Bitcoins recent plunge comes after a long bull run
with occasional hiccups that began in September
2015, making it the best performer of any currency in each of
the past two years, according to a veteran over-the-counter
trader for institutional clients. Whereas trading in Bitcoin is
still a long way from being a mature market, its ability to
survive bouts of sharp volatility is itself a sign of
underlying strength, the trader says. Every day Bitcoin
is around, it diminishes the prospects that it ever goes to
zero, and at the same time, more and more people start looking
at it as a legitimate asset, he says.
In the past two months Bitcoins bull run turned into a
stampede, as the price zoomed ahead by $442.29, or 54 percent,
according to the CoinDesk Bitcoin Price
index. From a November 3, 2016, close of $687.51, the
assets price rose to $1,129.87 on January 4. On January
5, after testing its peak price again, it plunged 17 percent in
a matter of hours and bounced lower over the next two days, to
$819.38 on January 7. The price has been less volatile since
last weeks low; it is currently trading near $904.00.
Traders say the Peoples Bank of China sparked last
weeks sell-off when it warned Chinas three largest
Bitcoin exchanges BTCChina, OKCoin, and Huobi to
strictly adhere to state regulations limiting individual
holdings. The warnings came as Bitcoin sailed past $1,000 and
then $1,100. The central bank publicized its warnings in a
statement released January 7 that also reminded the public that
it views Bitcoin as a speculative asset.
Limiting ownership of Bitcoin is seen as part of
Chinas efforts to reduce capital flight and manage the
orderly decline of its currency. As the yuan falls, Bitcoin
rises and vice versa. The linkage is in part because of
the fact that leveraged trading volume on Chinese exchanges
represents more than 80 to 90 percent of the global trading
volume of Bitcoin, says Steven Lord, co-founder of the Modern
Money Group, a consulting group, and who is also managing
editor at FINalternatives.
Because Bitcoins low trading volumes make it
extremely illiquid, changes in the yuans
value can have an outsize effect on the price of
Bitcoin, Lord says. Traders share this view. Its a
huge driver of trading activity, says one OTC trader.
Not everyone accepts the notion that Chinas currency
moves drive the price of Bitcoin, however. If you talk to
currency exchanges about it, they call that explanation
B.S., says Peter Vessenes, co-founder of the Bitcoin
Foundation and managing director of New Alchemy, a blockchain
consulting group based in Seattle. Vessenes thinks the market
is simply being manipulated by traders.
Still, in spite of its volatility, more investors have come
to see Bitcoin as a safe haven, meaning it can gain or
stay steady in times of economic volatility, says Pete
Rizzo, editor of CoinDesk. The safe-haven
effect was seen last year after the U.K.s Brexit vote,
and again after India began to remove some of its banknotes
from circulation, Rizzo notes.
An OTC trader reports that the average daily trading volume
for Bitcoin has benefited from a significant increase in
Bitcoin-enabled cross-currency remittances. The use of Bitcoin
for such transactions saves both time and money. It takes 72
hours and costs 10 to 15 percent of the transaction to do a
currency conversion using banks, according to the trader. By
contrast, it can take less than two hours and cost only 1 to 2
percent of the transaction when it is executed using Bitcoin.
The volume of trading involving foreign exchange payments
enabled by Bitcoin is only going to increase, he
Vessenes, however, remains bearish about Bitcoin. He
contends that the continuing low average daily trading volume
makes the digital coin vulnerable to 15 to 20 percent intraday
swings and to the intrigues of price manipulators. I
cant prove it, but it looks to me like it is all
speculation, he says.