By Olivia Tierney of Ursinus Finance Scholars
Japan- the World's Largest Bitcoin Market
On April 1st Japan (NYSEARCA:EWJ) enacted a law that accepted Bitcoin (COIN) has a legal payment method. Since then, Bitcoin trading volume has skyrocketed and increased its value by 80%. During this time, Japan surpassed China (NYSEARCA:FXI) and became the world's largest Bitcoin market in the world. The figure below illustrates the strike enacted by Japan's (NYSEARCA:DXJ) legalization of the cryptocurrency.
Bitcoin's Short Term Volatility and Long Term Bullish Market
How much longer can this steep increase go on? I believe Bitcoin will continue to surge in the long term. However, since the currency is so volatile it is possible to see a sudden change in the cryptocurrency's trend. Bitcoins immediate trends depend on three major world events. The first being the Chinese (NYSEARCA:GXC) economy. The second event is the uncertainty in the European Union (BATS:EZU) caused by Brexit Article 50 (NYSEARCA:EWU) and the French (NYSEARCA:EWQ) Election. The final aspect is the SEC's position on the Bitcoin ETF. Developments in these three areas could cause huge movements in Bitcoins value.
There is a credit bubble on China's economy that is likely to pop and increase Bitcoin's value. Following the 2008 financial crisis, China (NYSEARCA:ASHR) rapidly increased their credit to keep up with unsustainable growth levels. However, the increase in credit far surpassed their economic growth. Since 2008 China's debt-to-GDP ratio increased by 150%. Recent reports show that China's debt continues to grow disproportionally to their GDP. The figure below shows China's GDP versus economic growth compared to other rapidly growing economies. Notice that China's data produces a significantly flatter line than other countries.
Another factor of China's debt is that a majority of it is owned by the corporate sector which is backed by the state. This is a scary reminder from 2008. All of this leads to the strong possibility of a huge economic downturn in China. However, analyst have predicted this downturn for a few years and are unsure of the exact timing of the downturn. In the meantime, the Peoples Bank of China (PBoC) has been implementing strict monetary policy to avoid the economic downturn. Such monetary policy has caused shocks to the market. During these shocks and the in the case of a downturn investors are likely to find refuge in Bitcoin investments; despite the efforts of the PBoC.
Throughout the course of 2016 China poured money into their plunging currency in hopes of enticing investors. However, investors flocked to Bitcoin as the yuan continued to depreciate. In response the PBoC imposed strict regulations and warnings against Chinese Bitcoin exchanges in January 2017. These regulations caused an initial shock to the cryptocurrency. The figure below illustrates Bitcoin's decrease in value.
After the initial shock of the market investors fled to underground exchange markets. The figure below shows the spike in trading volumes on LocalBitcoins, an underground Bitcoin exchange, shortly after the PBoC released regulations and warnings.
Thus, Bitcoin transactions continue to surge against the actions of the PBoC. Comparing the top two charts, the surge in transactions is met by a steady price increase. This proves the cryptocurrency's resilience. Bitcoin is very receptive to shocks in the Chinese economy but is able to bounce back and gain value. Applying this analysis to the shocks sent to the market by future PBoC monetary policy; the shocks could cause an initial crash followed by an ascent to new highs. The rise of populism could have a similar effect on Bitcoins value.
French elections and Brexit Article 50 have pushed investors toward Bitcoin during a period of geopolitical uncertainty. Article 50 has been triggered and the U.K. is well on its way to leaving the EU. The French far right presidential candidate Le Pen's success in the polls and ongoing French parliamentary elections instill additional uncertainty in the European Union. The increase in populism has forced investors to flock to alternative investments. Historically gold has been a safe haven for investors during time of uncertainty. However, Bitcoin has been filling that void for some investors. Additionally, Luxembourg has nationally regulated a Bitcoin exchange which has surged the cryptocurrency's popularity in the continent. Developments in world populism, such as upcoming German election and Italy's Five Star Movement, could continue fuel the Bitcoin bull market.
In the end of March the SEC denied a bid to create a Bitcoin ETF. This caused the cryptocurrency to plummet. However, the plummet was quickly followed by Japan's legalization of Bitcoin. Since the surge in price the Barry Silbert's Bitcoin Investment Trust has doubled its initial public offering. The increase in IPO also fueled the recent bullish Bitcoin market. As this offer passes through the SEC its success or failure could have material impact on Bitcoins value. If the ETF was to pass, Bitcoin's value would likely skyrocket. On the other hand, if the ETF was to fail, it would depreciate the cryptocurrency's value for a short period of time.
Bitcoin Options Trading
Following China's credit bubble, populism, and possible Bitcoin ETF open countless investment opportunities.provides valuable insight to investors wishing to invest in Bitcoin. While investing in Bitcoin can seem intimidating because of its volatility its 2428471% increase since inception in 2009 continues to entice investors. Many investors and market experts recommend going long on Bitcoin and holding the investment. However, based on the analysis on Bitcoin's volatility above, I argue that shorting Bitcoin or long short-term holdings may prove just as valuable. That being said, the timing of these investments is crucial. Keeping track of China's credit bubble, populism, and the possible Bitcoin ETF are excellent starts in determining the timing of these investments. Exploiting the potential movements highlighted above has potential for rewarding returns. Investors can also capitalize on the cryptocurrency's movements and/or protect against downturns by constructing options.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.