With most financial markets in vacation mode, bitcoin is the only currency making big moves in a holiday-thinned trading week.
After crashing by more than $8,000 from an all-time high, bitcoin is up 3.5% at the time of writing. Although the recent plunge frightened many bitcoin fans, when looking at the relatively short history of bitcoin trading, the price action seems just normal. During 2017, the cryptocurrency crashed by 30% or more six times. Every fall was followed by huge price appreciation until it peaked on December 17.
Whether the bitcoin bull market is close to an end or just pausing for a short break, remains a wild question for 2018. I still believe that bitcoin is in a bubble formation. However, there’s no effective test to measure at which stage we are currently standing. For example, equity prices may be in bubble territory if investors are willing to pay much more for a stock than the intrinsic value, which is justified by the discounted divided stream. Similarly, econometric tests may be run on bonds, commodities, currencies or any other assets to come up with a justified value. For Bitcoin, there isn’t any fundamental basis to justify the price.
Traders should look at multiple factors to anticipate the next move, such as government regulations, hedge funds interest, the stability of the network, and broader mainstream adoption.
However, the latest signs are not encouraging. Here are a few:
• Israel became the most recent country to propose banning companies based on digital currencies from trading on its stock exchange.
• A South Korean bitcoin exchange has been hacked, leading it into bankruptcy.
• Cryptocurrency exchanges are disabling transactions temporarily due to high traffic.
• Professional traders on Cboe seem to be going short on bitcoin.