Article / 03 January 2017 at 13:00 GMT

Bitcoin just got hot again

Former managing editor, TradingFloor.com / Saxo Bank
Denmark
  • Bitcoin hits three-year high as Chinese demand takes out $1,000 mark
  • Price rise mimics surge of late 2013 when cryptocurrency peaked at $1,200
  • Bitcoin sank to $350 in 2014 after data-theft scandals and regulator crackdown
  • Surge in recent weeks propelled by safe-haven buying
  • Fear of bubble rising, but cocktail of factors could lift Bitcoin higher
  • India's demonetisation experiment offers possible leg up opportunity

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The topsy-turvy world of Bitcoin has been characterised by ups and downs. Photo: iStock

By Martin O'Rourke

It came, it saw and then fell so far off the radar that we wondered whether Bitcoin would ever enter the realms of serious debate again. Well it has and then some after it hit a three-year high this week to go through the $1,000 barrier.

Back in December 2013, Bitcoin topped out at just under the $1,200 mark briefly igniting talk of the cryptocurrency becoming more valuable than gold, a frivolous comparison you might say, but still a barometer of its rise. On November 29 2013, Bitcoin was at $1,186 while the precious metal was at $1,247/oz.

That tantalising prospect never quite became reality. Saxo Bank’s technical analyst Kim Cramer-Larsson correctly called it a bubble at the time in a memorable article that went viral and within a few months, Bitcoin was in full-on retreat mode to fall below $400 after Chinese banks gave notice to local Bitcoin exchanges that their accounts would be frozen on April 15, 2014.

It seemed to signal the virtual death knell for the fledgling cash surrogate.

Not anymore. The libertarian-inspired cryptocurrency licked its wounds for the best part of two years hampered by various data-theft scandals and regulatory crackdowns before it began its slow, inexorable climb back to four figures at the start of the summer.

The move has particularly gathered pace since the start of last month for a 31% jump to today's high of $1,029.94, according to Coindesk.com.

The rise and rise of Bitcoin...since last summer at least

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Source: Coindesk

Charting the rise is one thing. Understanding why is another.

China, where some 90% of global trading takes place, has clearly been the main driver in propelling Bitcoin higher. That has something to do with the steady depreciation of yuan against dollar over the last 18 months or so, ever since Beijing devalued the currency on August 12, 2015 with a new fix at 6.3305. That, more or less directly, led to Black Monday less than two weeks later which left oil and global equities crushed.

USDCNH has since climbed steadily higher to come within a whisker of breaking through the 7.0 handle on December 30, 2016 and the fear that yet another leg lower in yuan could be on the cards if 7.0 is breached is probably forcing safe-haven seeking investors into Bitcoin.

That may even have been exacerbated by the likely sharp turn in US foreign policy after president-elect Donald Trump steps into The White House on January 20 as he has made it unambiguous that he has China in his sights. His fiery rhetoric, if acted upon, could spark a chain of events towards a trade war between the globe's two largest economies.

USDCNH has come within a whisker of the 7.0 handle after
Beijing set it on a downward course in August 2015

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Source: SaxoTraderGO

Bitcoin has of course been the darling before and we should naturally be sceptical as it enters the fray in 2017 once again as a market favourite.

The reliance on Chinese buying is undeniably an Achilles heel but if the demonetisation of India gathers pace after it outlawed some of its smaller denominated notes in the autumn (and which had been due to come into effect December 31), it could give the cyryptos yet another leg up.

If that happens, then Bitcoin as the vanguard of the group could be in line for significant gains. It might even be a gamechanger.

Of course, Bitcoin's recent success does beg the question as to why safe-haven seekers are not turning to traditional homes like gold. Gold has seen a dribble of buying over the Christmas period enabling it to rise from around the $1,130/oz zone to just shy of $1,150/oz ($1,147.76 at 1004 GMT), but it's hardly a resounding vote of confidence in the precious metal.

The Federal Reserve rate hike last month in part explains that, but it is the likely trajectory of a minimum two-rate-hike for 2017 trailed by chair Janet Yellen last month alongside the stronger dollar that has stopped gold gaining any real momentum into the new year.

That's left the likes of Bitcoin to clean up. The herd mentality so often prevalent in China's fledgling stocks and markets environment (witness the extraordinary gyrations in the Shanghai Composite Index over the last 2-3 years) has also helped swell the surge into Bitcoin to potential bubble territory again.

"Are we building a new, higher bubble, well most likely," says Cramer-Larsson, author of that Bitcoin piece in November 2013. "If we look back in history we saw a bubble pattern in May 2013. What now looks like a small correction was in fact a bubble."

"How big that bubble and correction actually was compared to the next one is best illustrated by looking at a log chart and compare it to the linear chart," he says. "So why do I believe it is just another bubble?"

Bitcoin logarithmic daily chart
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Source: BitStamp

"Before Bitcoin took off going almost stratospheric it was trading above and testing the 200-day simple moving average for quite some time. After the implosion of the latest bubble around 2013/14 it was trading below the 200-sma for a long period of time before breaking back above," he says. "Now it has taken off after breaking the $800 resistance."

"It will most likely test the previous all-time high at around $1,150, ie. within a couple of weeks, but I don’t think the resistance at that level will be strong [and there] may be just a minor correction  before Bitcoin move to higher levels pushing for $2,000." 

Bitcoin normal linear chat. It went through two bubbles before it imploded at the end of 2013

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Source:BitStamp

$2,000? Certainly, Saxo Bank's Asia macro strategist Kay Van-Petersen made a compelling case for such a rise in our Outrageous Predictions 2017 publication, citing the much-anticipated Trump spending binge on fiscal policy as a likely driver.

"Cryptocurrencies are here to stay and the lead among them is Bitcoin," said Van-Petersen. "The Trump regime will pull out all the stops on fiscal spending...tripling the current account deficit from $600 billion levels close to $1.8 trillion forcing the Fed to hike a lot faster."

"That could see a lot of stress in emerging markets and specifically China which could see EM seeking alternatives leading to more adoption of Bitcoin and the blockchain," he said. "You could see Bitcoin go from $700 to well over $2,000."

Van-Petersen made those comments at the start of December. The upsurge in fortunes since then has been phenomenal. He's in line for a major bullseye as things stand.

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The Chinese have shown they adapt very quickly to technological advances. Photo: iStock

Martin O'Rourke is managing editor at Saxo Bank

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Martin O'Rourke Martin O'Rourke
Bitcoin has plunged from a high Thursday of $1,153 to below $900. It was at $950.58 at 1410 GMT, according to Coindesk.com.
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Martin O'Rourke Martin O'Rourke
What we said Thursday after Bitcoin collapsed by more than $200 in the space of an hour. https://www.tradingfloor.com/posts/bitcoin-200-plus-plunge-fits-with-double-bubble-thesis-8367248 Bitcoin Friday at 1031 GMT was at $923.04, down more than 8% on the Thursday close.

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