Bitcoin spiked briefly above US$5 000 on Tuesday, a level it hasn’t reached since it crashed spectacularly in November. The surge pulled up other cryptocurrencies, too. But have no fear of missing out: whatever the explanation, there’s no good reason to turn bullish on crypto.
If you go to crypto websites or follow the market’s opinion leaders on Twitter, it’s clear this universe has been captured by near-euphoria in recent days. “I’ve never been more bullish about crypto than I am right now,” TechCrunch founder Michael Arrington, who runs a crypto investment fund, tweeted on 29 March.
It’s hard to understand, though, what that optimism is based on, unless you’re willing to buy “macroeconomic” explanations put forth by crypto ideologues. Former Goldman Sachs analyst Brendan Bernstein, for example, opined recently that a “perfect storm” was brewing that would favour bitcoin: the rise of democratic socialism in the US, the government’s growing interest expenses, continued money-printing and strain on the pension system from retiring baby boomers. But why would investors see bitcoin as a better safe haven than other, more traditional investments?
There has been no good news about cryptocurrencies lately — they aren’t acquiring greater acceptance as investments or payments, and the crypto experiments of central banks, governments and major companies haven’t moved beyond dabbling. There’s been bad news, though — more big hacks, more dying currencies, more pump-and-dump schemes (sometimes, the extinctions and the schemes go together).
In a recent presentation to the US Securities and Exchange Commission, Bitwise Asset Management, a company that would like to create a crypto exchange-traded fund, said 95% of crypto trading volume reported by the most popular source of such data, CoinMarketCap, was fake or “non-economic”. The fraud is taking place on dodgy exchanges, which are used for pumping and dumping or simply report huge volumes to inflate their importance. According to Bitwise, $1.2-billion in bitcoin was traded in the last 24 hours. That includes the period when the $5 000 bounce occurred.
Bitcoin is a tiny market compared to global forex trading volumes of about $5-trillion/day. And even Bitwise, which argues that the better exchanges are well-surveilled and that the volumes there are real, cannot guarantee its numbers are free from distortions.
Given the small real trading volumes, any number of events could have caused Tuesday’s spike: a “mystery buyer” who placed a $100-million bitcoin purchase order on multiple exchanges, or even trading bots going crazy over an April Fools’ Day story saying the SEC has approved two crypto exchange-traded funds. It could be neither: perhaps enough retail investors saw all the optimistic tweets and drove the market up, which sparked a frenzy based on the fear of missing out, as sometimes happens in small, wild markets.
It doesn’t really matter. The spikes and the unjustified bursts of optimism are best ignored. Without the hype that often accompanies cryptocurrency spikes, more of the questionable “coins” would die out faster, more dodgy exchanges would fail and more scammers would move on. Meanwhile, work could continue on ironing out the underlying blockchain technology’s kinks and finding some real-world applications. — (c) 2019 Bloomberg LP