How to make sense of bitcoin's crazy week

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How to make sense of bitcoin's crazy week

This week's tumultuous bitcoin price action has likely provided fuel to the fire of the investment banks and others who have been lobbying the US derivatives market regulator, the Commodity Futures Trading Commission (CFTC), to delay or even shelve the launch of bitcoin futures trading.

The Chicago Board Options Exchange Global Markets is scheduled to start trading this coming Sunday, with the Chicago Mercantile Exchange following on 18 December.

This week bitcoin at one point traded at $19,000 on US exchange Coinbase, although has since fallen back.

According to industry website Coinmarketcap.com, which sources its price data from global exchanges, the price has surged 80% since 2 December - from $10,533 to $18,289. At the time of writing bitcoin trades at $16,467 on Coinmarketcap.com and $15,800 on the CoinDesk bitcoin price index.

Stefan Ingves, governor of Sweden's Riksbank, and the chairman of global financial regulators' body the Basel Committee, described investing in bitcoin as "dangerous" and refuses to even consider it a currency. "It's crypto-something … Kind of a crypto-asset but definitely not a cryptocurrency," he told CNBC.

According to the Financial Times, Wall Street investment banks are pressuring the CFTC to block bitcoin futures.

There is no indication that this will happen on Sunday, but the banks are taking matters into their own hands.

Even supporters of the cryptocurrency are worried by the extreme volatility. Chief executive of BitPay, which provides payments solutions for merchants, said of this week's price movements "I'm 90% certain this is a bubble".

He continued: "It's not something we are necessarily happy about. I don't like this crazy unsustainable volatility."

Prices on exchanges have been diverging markedly, providing arbitrage opportunities for traders.

For example, Coinbase's bitcoin price has been trading at a premium to the rest of the market. And internationally price differences have been growing too, with quotes on South Korea's Bithumb exchange on Friday showing bitcoin priced as high as $20,000.

JPMorgan, Bank of America Merrill Lynch and Citigroup have all said they will not be providing their clients with access to the CBOE futures product, while others are limiting access.

These banks are gateways into the futures markets for hedge funds and others, so their attitude will determine the success or otherwise of CBOE's launch at the weekend.

As we reported earlier this week, there are concerns that the massive price swings frequently seen with bitcoin could undermine the brokers and clearing houses that operate on the derivatives exchanges, and possibly even destabilise the financial system.

If the futures launch is stymied by the banks it could trigger a sharp correction in the bitcoin price. And if it does go ahead as planned, it may lead to shorting by hedge funds betting on a price fall, which could also weaken price momentum.

The prospect, or otherwise, of trading in bitcoin futures is not the only factor that has fueled recent buying momentum. A number of other elements have to come together to help sentiment.

On Wednesday, the Lightning Network was successfully tested. The much-anticipated event provides a scaling solution for the bitcoin network in the shape of an off-chain layer for payments.

Meanwhile, Australian Securities Exchange (ASX) announced this week that it will be putting its clearing system on a blockchain, with a timetable for deployment to be made available in March 2018.

Chief executive Dominic Stevens said of the move, "it will put Australia at the forefront of innovation in financial markets".

The exchange will be using its own private blockchain, but the adoption of the technology is seen as positive for the crypto industry as a whole, and, therefore, for bitcoin.

Another indication of blockchain-based products beginning to come to market, in perhaps a less serious way, is witnessed by the viral success of the Cryptokitties game where players trade and breed virtual cats. It is the first example of a successful decentralized app - or dapp - running on the Ethereum blockchain.

Indeed, so successful has Cryptokitties been that a number of initial coin offerings have had to be postponed due to network congestion.

The Ethereum congestion issues was a positive development for 19th-ranked coin Qtum, which provides a scaling and security solution for Ethereum. QTUM reached a high for this month of $13.61 on Tuesday 5 December.

Also, bitcoin's advance was not held back by the $70 million hack of the NiceHash crypto-mining site in which 4,700 BTC was stolen. Chief executive Marko Kobal, in a Facebook video, claimed it was "an incredibly coordinate and highly sophisticated attack".

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.