Bitcoin…Currency or Commodity…It seems confusing

  • There is too much volatility in cryptocurrencies
  • They fail the test of being “money” as there is no source of final accountability
  • Delaying SegWitz2X is not progressive
  • It is correct to call Bitcoin a commodity

A lack of volatility can destroy a market. If an asset just goes up, or just goes down, there is no incentive to trade and the market place begins to resemble a hushed library as against a tide of ebb and flow. The market loses its purpose, dealing is diminished and market breadth is curtailed.

In contrast, too much volatility can create such a sense of confusion and extremes of joy and despair that the market becomes equally difficult to get to grips with. It is like catching a falling knife.

That appears to be the case with the leading cryptocurrency, Bitcoin, at the current time. Over the last month the market metrics read as follows:

Highest:           7,895.00          Lowest:             4,815.10          Range:  3,079.90        Average: 6,245.88

Total Days        31                    % Gain:           +63.48%

Days Up:          18                    Avg % Up:       +3.84%                        Highest: +12.51%

Days Down:     11                    Avg % down:  -2.12%                         Lowest:  -8.21%

Certainly, the performance over the past 12-months has been nothing short of a wild and at times crazy ride.



Source: Spotlight Ideas


An odd few days

Given that investors…or should we simply say, “speculators” can trade Bitcoin over the weekend the hours straddling Saturday and Sunday has seen the price of Bitcoin US Dollar, i.e. BTCUSD demonstrate extreme volatility, declining to $5,500 at one point. Since hitting a new weekly low, it has recovered to $6,165 as at 14:00 GMT on November 12th, 2017.

I feel somewhat vindicated as in a presentation I gave in London on Thursday, I suggested that if the price rallied in July and August because the new gateway, SegWit2X would open on greater volume then why should it rally for long when the gateway was delayed? Certainly, one could understand a minor move higher as a potential third split in the currency would be avoided…however, this was not sustainable.

Therefore, I see the recent decline in the price of Bitcoin being a direct result of the realisation that for now, at least, miners of Bitcoin will have to be content with a block speed of just 1.0Mb/7-minute period.

One unexpected side effect has been that whilst a new split has been avoided the original spinoff currency, Bitcoin Cash has surged and then fallen again. It appears the movement of SegWit2x supporting investors, and speculators are looking toward Bitcoin Cash with one unified vision.

Consequently, the price level of Bitcoin Cash has increased from $600 to $1,500 in the past week, reaching $2,800 earlier on Sunday. However, volatility is in the DNA of these currencies for as the price of Bitcoin Cash plunged from $2,800 to $1,500, the price of bitcoin recovered, from $5,700 to $6,165.

Bitcoin cash


Such volatility has rarely been seen in currencies, perhaps only when there has been a developing country currency crisis or maybe when Sterling was pitched out of the European Exchange Rate Mechanism on September 16, 1992.

Bitcoin as a commodity, not a currency

On October 31st, the CME Group, the world’s largest derivatives trading house by volume announced that it would launch trading for Bitcoin futures contracts before the end of the year. This is subject to the approval of U.S. Commodity Futures Trading Commission (CFTC).

Bitcoin’s price has seen a steady bull trend since the announcement, rising more than 10% the following day. It continued to hit all-time highs throughout that week. Ironic in that a futures contract would make playing the short-side more accessible.

However, one reason for the rally was that a Bitcoin futures contract will greatly increase the probability that a Bitcoin exchange-traded fund (ETF) will be approved. The U.S. Securities and Exchange Commission (SEC) previously requested fund managers to withdraw their registration statements for Bitcoin ETFs, since they would be an unregulated investment, The SEC requested they wait until regulated derivatives for Bitcoins became available.

This would reinforce the view that Bitcoin cannot be considered a currency.  Mohamed El-Erian, Chief Economic Advisor at the German financial institution Allianz said that currencies normally serve as a store of value, but that they must be predictable and stable to work as a medium of exchange.

El-Erian is not the first major figure in mainstream finance to view Bitcoin as more of a commodity than a currency. The Governors of the Bank of Mexico and the Bank of Korea both gave similar assessments this year, as did the U.S. Commodity Futures Trading Commission in 2015.

Tighter regulation expected

Regulation for crypto or virtual currencies is seen by many financial authorities as appropriate and necessary simply because they should be regarded as a commodity. With legal identity such as central bank behind them they do not operate at the level of legal currency.

It appears that work in this area has already advanced in some form as in August there were calls in several nations for tightened regulations to apply to cryptocurrency exchanges given the sharp swings in direction and the almost unbearable volatility.

One of the real ironies is to be seen in that it is the world’s oldest central bank, in Sweden that has led the way in conducting virtual currency research and sought to control the spinning top of free ranging cryptocurrencies by being a long way along the path toward introducing an “eKrona” to run alongside the main currency.

Whatever the future may bring, the wild and free, unbridled days of the crazy crypto casino are numbered.

Read more macroeconomic analysis

Stephen Pope

Macroeconomic Strategist

Stephen Pope is the Managing Partner of Spotlight Group. He has worked in the world of finance since 1982 and has performed d...continued

Comments on this analysis

Your email address will not be published. Required fields are marked *

Latest Related News

BITCOIN Is Still Dominating In The Crypto Market

Hello traders,today we will talk about overall Crypto market and its Dominance. BITCOIN and most of the ALTcoins have seen a deeper decline in the last couple of months, mainly because BTC have been losing its dominance. But, after that strong BTCUSD bounce, seems like BTC Dominance is back, especially if we take a look in the BTC.D chart in which we see a corrective… Continued

BTCUSD and EURNZD – Both Bullish! (Elliott Wave)

BTCUSD is recovering in a five-wave manner up from the 9200 region, where a higher degree correction had found a base. We see a clear recovery underway, which can now be stopping for a temporary correction as wave (iv), which can be either a flat or a triangle. Once wave (iv) fully develops, that is when we expect to see a new bullish continuation towards… Continued

End of Week Market Wrap 20181130

We had a positive start to the trading week in regards to equities. Major indices were boosted from the positive EU Economic Summit with firm gains on return from the Thanksgiving weekend and with a boost for retailers from Black Friday and Cyber Monday sales. Brexit was on the agenda at the beginning of the week. UK PM May was in Brussels over the weekend… Continued

Elliott wave Analysis: EURUSD and BTCUSD Update

EURUSD looks as it has ended its complex decline, down from September highs as we see all three waves W,X,Y unfolded. Also price made a recovery at the 1.122 level, indicating that wave Y found a low, and that a minimum three-wave reversal to the upside is now in play. In such case, we would expect to see price reach 1.15 level in upcoming sessions,… Continued

Bitcoin Cash and Ripple Can Face A Reversal – Elliott wave Analysis

Bitcoin Cash made an impulsive rally, but still can be a part of a three-wave a-b-c regular 3-3-5 correction. We still think that Bulls are not ready yet, especially because of a bearish looking BTC and friends, so we assume that BCHUSD can be making just a bigger flat correction in wave 4 of a higher degree with resistance around 660 level. That said, be… Continued

Forex Brokers in your location