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Bitcoin has smashed through the psychologically important $10,000 level. Having seen a more than 10-fold rise in value so far in 2017, it has been the best performing asset across all classes. But the astonishing rise is coming with plenty of risk warnings.
If you were to say on 1 January 2017 that bitcoin would break $10,000 before the end of the year, it’s likely you would have been laughed out the room. It had already seen a 100% increase from the start of 2016, which in itself was a massive rally from the $160 levels in January 2015.
However, on 29 November 2017, bitcoin broke above $10,000. There is something incredibly satisfying about round numbers, and in much the same way as the ‘Dow 10,000’ in the late 90’s, bitcoin 10,000 is a level many have been focusing on for some time.
Famously, in 1999, the New York Stock Exchange (NYSE) issued a number of commemorative caps which marked the euphoric time the Dow first crossed 10,000. After the first cross there was a lot of back and forth price action, however market conditions at the time, and the dot com rally, helped the Dow push another 17% to the upside before a significant market correction. Pictures of the ‘Dow 10,000’ hats with stickers correcting the value down to 8000 a year later give a little perspective to how quickly things can change.
The Dow rally in the late 90’s was very different to the bitcoin action of 2017. Things like asset-backed valuations, forward earnings, dividend yield and earnings ratios have no place in the cryptocurrency market. So what can we evaluate when looking at bitcoin? No one really knows, and due to the difficulty of pricing this new asset, volatility is prominent.
Speaking on the BBC, Sir John Cunliffe, deputy governor of the Bank of England (BoE), warned investors and traders of bitcoin to ‘do their homework’ before taking a position. He believes bitcoin is behaving more like a commodity than a currency. There are plenty of others giving similar warnings, and there are clear characteristics between bitcoin’s astonishing rise and previous asset bubbles. But without the ability to calculate a fair value for bitcoin, it’s difficult to say whether it’s a bubble or not.
There are factors related to bitcoin that are interesting for the statisticians, but most of these are very technical and relate to the underlying technology. Things like hash rate and difficulty adjustments on the protocol are important to research, as are things like the total number of wallets in circulation. This gives some insight into global adoption, and if you’re fancy with excel you can plot price action against hash difficulty – there’s an argument for strong correlation. Maybe this is how we start assessing bitcoin’s value, and maybe a better understanding of these methods would provide greater stability in the price. Only time will tell.
Like all assets, no one will be able to predict with absolute certainty the future price of bitcoin. Will it go up? Probably. Will it go down? Probably. What’s important is that it managed to get to $10,000. Bitcoin still remains outside of the central banking remit and it’s proven itself as a revolutionary technology, but its future as an asset is anyone’s guess at this time.