(October 17)In spite of many warnings that the purchase of bitcoins was risky and even claims that it was a fraud, bitcoin went above $5,000 per coin on Thursday reaching a new high of $5,856. 10 during the day.
For this year alone, bitcoin the biggest cap cryptocurrency has advanced in price 500 percent . Bitcoin is less than nine years old and was worth virtually nothing when first created. Its price is still quite volatile and the coin is less liquid than traditional currencies or gold and silver and many stocks. The reasons for its recent increases are not that clear.
Some of the reasons for the advance are reports that Goldman Sachs is considering offering trading in bitcoin. There are also rumors that China may ease restrictions on bitcoin trading after it had earlier banned IPO and also shut down exchanges.
While Goldman Sachs is said to be considering trading in bitcoin Jamie Dimon CEO of JP Morgan has called it a fraud. Nevertheless, the rumor that Goldman Sachs may trade bitcoin may have helped increase its price.
A main factor may simply be that the bitcoin market has provided astronomical gains in every year but one since 2010. Ryan Nettles at Swiss bank Swissquote said:“People are just wanting to be part of it.” Nettles who is head of FX trading and market strategy at the bank said that interest from banks, hedge funds, and brokers was much higher than he anticipated. He claimed that much of the interest came from media hype of bitcoin.
Even though Russia's president Putin warned of serious risks in the current market and Russia's central bank said it would ban cryptocurrency trading websites, investors appeared to pay little attention. Bitcoin had almost reached $5,000 at the beginning of September but fell back sharply after Chinese actions against trading and IPOs. Jamie Dimon's remarks did not help. Bitcoin dropped below the $3,000 level in the middle of September only to bounce back by more than 75 percent in a mere four weeks.
Iqbal Gandham, managing director at the retail trading app eToro which has seen huge increases in cryptocurrency trading said: "Bitcoin was designed to operate outside of the influence of governments and central banks, and is doing exactly that.” Even European Central Bank governor Vitor Constancio warns investors of a bitcoin bubble, but some analysts claim the price could go much higher. However, there seems to be no agreed upon way of determining the value of bitcoin beyond the present market price.
In just a few weeks, bitcoin may face a contentious split in its blockchain as the second part of the plan Segwit2x is introduced. Before the deadline for accepting the original Seqwit2x plan at the beginning of August a group unilaterally decided to make the block size 8 times larger without introducing Segwit or making blocks twice as big or 2x. This created a rival coin Bitcash. Alhtough it is much less valuable than bitcoin it has done much better than some predicted. Last I looked it was trading at $460-470 dollars Canadian. The introduction of Segwit later in August did not create another coin as happened when Bitcash was created but was in contrast a "soft fork" as explained in the appended video:
You would think all the uncertainty and possible decline in value associated with the coming fork would result in a fall in the value of bitcoin whereas exactly the opposite is happening. Chris Pacia who helped develop OpenBazzar an open marketplace, said on Facebook: "Bitcoin traders are some of the most irrational investors you'll come across." Yet there may be some sense behind the move.
When a hard fork occurs owners of the present bitcoin will not only keep their present bitcoins but receive an equal amount of the new coin created by the fork. When bitcoin split in August to create Bitcash the value of the original bitcoin fell steeply but it then recovered and continued up. As this article notes: "Distributed to all bitcoin owners at the time of the fork, investors were suddenly given an equal amount of valuable cryptocurrency ... Far from a risky proposition, investors see that extra value as just created out of thin air and delivered to existing investors for free." Harry Yeh, of the cryptocurrency investment firm Binary Financial said:"Investors are just looking at it like, 'I'm going to get more tokens right now.' It's just that simple." He said that often these are well-established investors not newbies. Yeh said that traditional economic rules do not apply and that previous hard forks not just of bitcoin but of ethereum actually created value rather than destroying it.
Roger Ver a bitcoin investor and promoter claims that consensus between opposing camps looks increasingly unlikely a view echoed by many mining pool operators and programmers who helped develop the original bitcoin network. A recent Bloomberg article details the issues that are creating division. Ver has been moving some of his funds into Bitcash. He is not perturbed by a coming hard fork in bitcoin: “There’s probably going to be another split between bitcoin legacy and SegWit2X version of bitcoin but that just gives me more coins that I can sell for the Bitcoin Cash version." Investors in bitcoin could be in for a wild ride.
