No news is bad news….

Tuesday, 12th December 2017

No news is bad news….

‘Parabolic’ is my new favourite word….

This last fortnight, it’s followed me around the Internet like a lost dog….

I’m not sure exactly what it means. It’s all a bit mathematical for this layman’s simple mind….

It has something to do with the curve formed by the set of points in a plane that are all equally distant from both a given line and a given point that is not on the line.

I don’t get it. Donald Trump makes more sense. But swathes of commentators use the word to describe the latest rises on bitcoin’s price chart.

I understand better Stephen Roach’s assessment. The Yale economist says this:

‘I’ve never seen a chart of a security where the price really has a vertical pattern to it. And bitcoin is the most vertical of any pattern I’ve ever seen in my career.’

  • A wild ride….

But progress hasn’t been straightforward. The price remains volatile. Huge gains are frequently followed by significant losses….

Last week bitcoin breached the $17,000 ceiling before dropping to $15,610. Then it was up to $16,126 before falling back below $15,000. On Sunday the price dropped as low as $13,159. On Monday evening it was back up at $16,575….

White water rafting is tame in comparison. And this volatility undermines the argument that bitcoin is set to be the currency of the future. A currency that can drop 20% overnight is not one that will gain widespread acceptance.

Who can trust such a thing as a store of value?

Does any business want to accept payments in bitcoin only to discover they are worth 20% less just hours later?

Last week, Steam, the on-line game service, stopped accepting bitcoin payments – citing volatility and rising fees as key factors in that decision and describing the cryptocurrency as ‘untenable’….

Whilst the bitcoin price continues to fluctuate so wildly, the cryptocurrency remains a long way from replacing domestic fiat currencies – no matter what the hard-core cryptocurrency revolutionaries say….

  • No news is bad news….

One thing you can’t doubt is that bitcoin possesses bounce-back-ability. Nothing seems able to dent the market’s confidence in the cryptocurrency for long….

Not the lack of fundamentals. Not the lack of cash flows or yield or any physical assets that serve to back the price up….

Not the recent attention paid to bitcoin trades by the IRS, the American tax-collector. Not Metropolitan police claims that drug dealers are laundering cash at bitcoin ATMs….

Not the recent story about a security breach that enabled hackers to steal $70 million worth of bitcoin from NiceHash – a cryptocurrency-mining service….

Not negative news stories emerging last week that say bitcoin is ruining the planet – thanks to the staggering quantities of energy required to mine bitcoins and power individual transactions….

Bitcoin marches on regardless. Nobody really knows what it is. Values are based on faith in the technology and the system – and faith remains staunch.

We can expect momentum to remain strong thanks to the introduction of futures contracts. Much of the gains over the last 24-hours are a result of CBOE Global Markets launching bitcoin futures contracts on Sunday night. CME Group go live on 18th December.

Futures will see more money pour into the market – including potentially vast sums of institutional funds that have largely remained on the sidelines until now….

  • A case of the jitters?

Volatility aside, bitcoin bulls continue to see the garden and the future as rosy….

Fair enough. But I was interested on Friday evening to receive an email from Coinbase – the digital currency exchange – with this subject header: Please invest responsibly….

‘The last few weeks has seen an unprecedented increase in the price of digital currencies. More people are engaging with our platform than ever and that bodes well for the future of the digital currency.’

The email went on….

‘Be an educated investor. We also wanted to remind customers of some of the risks associated with trading digital currency. Digital currencies are volatile, and the prices can go up and down. Due to the rapidly changing price of digital currencies, some customers may not have sell limits that are sufficient relative to the value of total digital currency they are storing on Coinbase.’

Is this email just an example of good practice? A case of a financial company discharging its responsibilities in good faith?

Or might it be an early warning sign that Coinbase officials are getting the jitters?

Might they be worried that more investors are entering the market irresponsibly and without an appreciation of the risks they are exposed to – perhaps driven by greed or the fear of missing out?

Hard to tell. But it was the first time Coinbase had communicated in that manner. And it came on the back of a volatile week when some investors might have got their fingers burnt or panicked….

  • Introducing bitcoin P/E….

Warnings such as the one issued by Coinbase will deter some potential investors from getting into the market and might encourage some of those already in the market to get out while the going is good….

But such are the potential rewards on offer (notionally, at least) that others will plough on regardless. Emails are easy to ignore. So too warnings – especially when there’s no shortage of ‘evidence’ to suggest the warning is wrong-headed….

I’ve been looking at the Network Value to Transactions (NVT) ratio – which is gaining traction as the bitcoin equivalent of the P/E ratio you might use to take a view on the value of a company’s stock….

Just as a low P/E ratio can point to a value stock, the lower the NVT ratio, the better value bitcoin is as an asset to invest in. That’s the general idea.

I’m in the early stages of my investigations but, in short, the NVT ratio amounts to the market value of all bitcoins in circulation divided by transactional activity in US dollars….

In other words, the more bitcoin speculation there is, the ‘cheaper’ and more attractive an asset bitcoin becomes.

If the market wants bitcoin to be even ‘cheaper’, all it needs to do is trade it more and more – so that the NVT ratio falls.

  • A strange measure of value….

You can study the NVT chart here. It makes for interesting fare.

According to the NVT ratio, bitcoin is ‘cheaper’ now than it was earlier in the year when the bitcoin price was much lower….

That feels odd and I’m not sure about the value of the NVT ratio. I’m not sure the rate or volume of speculative activity in an asset represents a reliable baseline for its true value.

But I’m happy to be proved wrong – and I frequently am. Many bitcoin aficionados are buying into the NVT figure.

I wonder if this might turn out to be a case of confirmation bias – where investors tend to seek out information that confirms their existing opinions and overlook or ignore information that refutes their beliefs.

In an environment where nobody really knows what is happening, why or where it might go, perhaps we should expect investors to look for and cling on to reassurance wherever they can find it.

It will certainly serve to keep the market tank topped-up with fuel….

  • Play like you’ve already lost….

In the meantime, if you’re thinking of heading into the crypto-markets, take heed of Mark Cuban’s advice.

The noted businessman and billionaire investor suggests you should enter the market from the perspective that you’ve already lost your money and anything that comes back should be looked upon as a bonus.

It’s the type of advice usually reserved for gamblers. So, it might be highly appropriate….

That’s how it looks from here….

All the best,

Dave Gibson

Money Truths