Interactive Investor

Bitcoin produces 1,000% return as bubble grows

26th May 2017 12:28

Gary McFarlane from interactive investor

The bitcoin digital currency is the best-performing asset on the world's financial markets, hitting another all-time high this week, to trade at $2,748.

If you had bought into the cryptocurrency back in August 2015, when the Money Observer bitcoin round-up argued that the currency had bottomed after falling to a comparatively lowly $230 on the Coindesk bitcoin index, you would now be sitting on a return of 1,000%.

In 'coinspeak', the currency now has a market capitalisation (price x number of coins in circulation) of $44 billion.

Market participants see global economic uncertainty as the driving force behind the currency's continued surge, although a number of other factors have likely conspired to put a rocket under the price.

Japan has moved to put the currency on a clearer legal and regulatory footing, driving renewed interest in the currency. A similar growth in interest has been in South Korea.

Chinese investors, dominant in bitcoin trading for some time now, are said to be attracted to the currency by the lack of other opportunities to diversify the assets they hold in their portfolios, and as a vehicle for getting around capital controls, although this may be overstated given the tiny size of bitcoin trading compared to the bond and equity markets.

Bitcoin has also overcome what were thought to be major obstacles to its future growth. Earlier this year the so-called 'scaling' debate was raging over how to increase the transaction volumes the currency can handle, and whether a 'hard fork' was required to fix this - which had raised fears that it could lead to the emergence of two different versions of the currency.

The rejection of a bitcoin exchange traded fund backed by the Winklevoss twins, which had been waiting for approval from the US Securities and Exchange Commission, saw a sharp price reversal when the regulator rejected it. However, the SEC has since said it is reviewing that decision.

Finally, the excitement and growing investment around the blockchain technology that underpins digital currencies such as bitcoin may also have helped sentiment. Start-ups such as the Ethereum platform and its ether currency, and a number of different consortia of banks and payment companies, provide evidence of the growing interest in using the technology to bear down on transaction costs and improve efficiency and security in their businesses by utilising so-called 'smart contracts'.

Today an ether is worth $197, with a market cap of $18 billion.

It hasn't all been plain sailing for bitcoin, though. James Comey, former director of the FBI, told Congress in April that he considers bitcoin a hindrance in the fight against crime, a remark that led to an immediate $100 price drop.

His concerns were brought into sharp relief by the WannaCry ransomware attack that went global earlier this month. The criminals behind the attack demanded payment in bitcoin before victims with affected machines could regain control. Bitcoin is an anonymous transaction system, which makes an ideal currency for illegal activities. But despite that temporary FBI-inspired setback, the rally resumed shortly thereafter.

Nevertheless, although the currency has made some progress in its journey towards acceptance as a means of exchange, it is still very far from being a mainstream payment method.

If you had bought, for example, $100 worth of bitcoin seven years ago, your investment would now be worth $82 million. And on 23 May, in another sign of the current price momentum behind bitcoin, Fidelity Investments in the US announced that its clients will be able to see their digital currency holdings on the fund manager's website.

Bitcoin is notoriously volatile, and as the price continues to rise, it will take a brave soul to enter the market at these heady prices. However, the bitcoin believers certainly think they've struck digital gold and that there's much more to come.

Twenty-eight year old Jay Smith is definitely a believer. He's a highly successful user of the social trading platform eToro, where he trades bitcoin and ether, as well as holding major US tech stocks such as Facebook and Tesla.

Smith, a self-confessed geek with a day job in the e-sports industry, has been devoting more of his time to trading on the site, where users are able to follow and copy other traders. His trading portfolio (70% of it in digital currency) has produced a 200% return over the past 12 months.

He also has a long-term holding in bitcoin that he has built up since 2013 and which is to date showing a return of 5,000%. "I started buying just before the Cyprus crisis and subsequent bubble," he told Money Observer. "What we are seeing now is reminiscent of that time. I think we are probably just at the beginning of a similar run up. I don't want to make hard and fast predictions but I wouldn't be surprised to see bitcoin hit $10,000 this year, although it could then just easily crash back down before resuming its rise."

Smith says there is a lot of new money coming in, and that that is likely to continue to increase as the news hits the mainstream media and interest, in turn, grows further. "People are jumping in because they can see profits happening," says Smith. He continues: "Those using leveraged money could get badly burned."

Smith does not recommend buying bitcoin on an exchange and instead points to platforms such as eToro as the best way for newbies to dip their toes into the cryptocurrency arena. It has low barriers to entry and you can follow and copy someone who has more experience.

He also trades ether - the coin behind the Ethereum platform - and advises new investors to split their holding evenly between it and bitcoin. He thinks Ethereum may have a better long-term future (10 years or more) than bitcoin because of the increasing number of useful applications now being built on its blockchain distributed ledger technology.

Smith now has more than 2,600 copiers (877 added over the past seven days), 17,701 followers and $2 million of assets under management - which is a measure of the amount of money from other eToro clients copying his trades. He also advises anyone who holds bitcoin to keep it in a 'hot wallet' on PC at home behind layers of security. You can find Smith on eToro where he trades under the user name 'jaynemesis'.

This article was originally published in our sister magazine Money Observer. Click here to subscribe.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.