This week, Bitcoin had the honour of being baptized into civilized society via the futures market. Over the past few months, it has gone from being synonymous with illegal trading and the Dark Web, to a positive household name. The digital currency has undergone a magnificent story – going from underground bedroom project to outperforming all other assets on the MSCI and being traded on Wall Street. But could the euphoria all be coming to an end?
Most of us know the history of Bitcoin and how it works, and if you don’t – you can read our past blog here to get some information on it. For now, let’s fast-forward to today. There are three salient points to be taken from Bitcoin’s acceptance onto Wall Street.
Wall Street’s Reaction to Bitcoin
Firstly, which has already been alluded to, is that Bitcoin has been legitimized. In effect, it has been promoted from the Minor League to the Majors. It is more than likely that fringe watchers will invest now after watching how the asset performs. It also means that people can trade Bitcoin without having to use Gdax and other (potentially) unintuitive software to invest; it also gives bearish people an ability to hold a position on the asset. Traditional asset managers interested in Bitcoin now have a way into the currency. Getting into the futures market isn’t going to alter Bitcoin forever, but it is certainly a gamechanger. For a lot of people, Bitcoin suddenly has become a lot more attractive; and the asset has risen nearly 300% since the first announcement in October.
Secondly, now that Bitcoin is in the “Big League”, it is likely to undergo a correction at some stage. Of course, this could be a matter of years or months. Bitcoin’s growth can’t be maintained, and investors will want to see less volatility if Bitcoin is going to be taken seriously by major investors. Bitcoin will eventually level out.
But this does not mean that Bitcoin is a bubble, nor does it mean it is not a bubble. Let’s unpack that information. If it is a bubble, then, of course, we will see people selling Bitcoin like tulips in 17th Century Holland pretty soon. But that is doubtful, as Bitcoin does have intrinsic value. It is more likely that Bitcoin will reach an overvaluing, and eventually a correction. This doesn’t have to be the Apocalypse – it could be that there is a healthy medium for Bitcoin that sits right for everyone. Acceptance onto Wall Street could help it find this correction.
This brings us nicely to the third salient point – how will Wall Street react to Bitcoin? Up until now, the validity of Bitcoin has been up in the air, value has been for the most part been determined by speculation and bedroom buyers. Fringe buyers once again will be watching Wall Street. If the futures market is successful, it will encourage more people to get involved. The CME and CBOE give the rest of the world, most importantly the “unsure” part of the rest of the world, something more tangible than hearsay on the value of the digital asset.
What should we take away from all this information?
Being traded on Wall Street via futures means that Bitcoin will likely do well in the coming months, but like all good things, it will eventually experience a correction. Cryptocurrency has intrinsic value, and while people figure out if a Bitcoin is worth 5, 10, 50, or 100 thousand dollars we will see a lot of volatility.