This week on Planet Bitcoin - 12 February 2016

Friday 12 February 2016

TL;DR The world is going to hell in a handcart, but bitcoin’s ok for now.

This week’s report is slightly longer than usual, because there is so much going on in the markets - traditional and crypto. We’ll start where we always do, with bitcoin.

In an unlikely twist, it has been a pretty uneventful week on the bitcoin markets - certainly quieter than anywhere else for once. At the end of last week we saw one of those suspicious-looking spikes from a level in the mid-$370s up the $380s and beyond. As is usually the case with such sudden moves, it didn't reflect genuine market sentiment and things soon cooled back to the $370s, where the price remained for the next few days. A recent slight lift back up to the low $380s is about the most excitement we’ve seen with bitcoin. It’s been remarkably stable while the rest of the world panics.

Chart 

Meanwhile, Ethereum has enjoyed a stunning price increase in recent weeks, and posted multiple double-digit rises this week. It has now increased six- or seven-fold since the beginning of the year. Volumes have, at times, been level with bitcoin’s volumes; hundreds of millions of dollars have changed hands and Ethereum’s market cap has risen to over $400 million. All told, the situation for ETH seems very similar to BTC’s at the end of 2013. It’s FOMO, and such a massive increase in price cannot last; the questions are only when it will top out, and how far it will fall afterwards. Ethereum is a promising project, but it does not have any meaningful adoption to reflect its current value and questions remain about the corporation’s funding. This is a speculative bubble, pure and simple.

Around the world

Outside of crypto, the picture is looking pretty bad. The major European markets were down heavily on Thursday, following Asian markets, on news that the Fed would not be raising interest rates again next month - and the suggestion that perhaps they wouldn’t be for a while longer. The US followed suit when markets opened. Fed chair Janet Yellen’s veiled admission that they had screwed up in raising rates in the first place led to a series of knock-on effects. The dollar was dumped; gold rose to over $1,200 - a nine-month high and up over 14% this year alone; the yield on 10-year UK gilts hit a record low of 1.314% as investors piled out of the FTSE looking for a safe haven; mining and banking stocks were down hard. Oil has fallen again after a brief recovery; shares in Credit Suisse are at a 25-year low. There are renewed concerns about Greek banks and new worries about the country’s ability to meet the terms of its bailout. The bounce in share prices the next day does not contradict the underlying picture.

Negative rates incoming

None of this seems to have affected bitcoin, which is unusual. It’s been the Chinese new year holiday, which takes some heat out of the crypto markets (Ethereum’s huge volumes have taken place on US exchanges Kraken and Poloniex). What might start to make a difference is further interest rate cuts. Sweden has just cut interest rates to below zero, following Japan’s recent decision to do the same. There is also a worrying conversation around banning large denomination banknotes; whilst the narrative is that only criminals use £50, $100 and €500 notes, there is also another undertone: making it harder for account-holders to withdraw cash means that central banks can successfully impose harshly negative interest rates, forcing people to pay for holding their own money in an effort to increase spending and raise the inflation rates that have so far proven stubbornly resistant to rate cuts.

Brave new world

Back in crypto, we might expect this to filter through to bitcoin in the coming months as people become increasingly aware of the need to sidestep such controls on their money.

Ethereum’s rise, meanwhile, heralds a new dynamic in the crypto markets. Previously the picture used to be that a rise in bitcoin would lead to a fall in the alts, as money was pulled out of them to get in on the BTC action. When bitcoin started to stall again, profit-takers would put money back into underpriced alts. Alts and BTC therefore moved out of phase with each other. Now, Ethereum is in the mix as a highly liquid crypto. It’s possible and likely that when ETH tops out, ignored alts will see some fresh action (today, many are showing strong gains). However, it’s also noteworthy that the money coming into Ethereum doesn’t seem to have affected the alts much on the way in, raising the prospect of a large tranche of entirely new cash flowing into crypto.

Lastly, Bitcoin Classic has finally been published. It’s perhaps the last chance for bitcoin to scale properly before we run into real problems with delayed transactions. In order to be activated, Classic requires that more than 75% of blocks in the last 1,000 should be mined with its software. After that trigger, there will be a 28-day grace period for nodes and miners to update with Classic before 2MB blocks start being created. At the time of writing, of the bitcoin network’s almost 6,000 nodes, 810 are running Classic - a pretty good start given that it’s only a few days old. XT is falling from favour with only a couple of hundred supporters.


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