Bitcoin: meteoric price increases won’t last

David Coker, Lecturer in Accounting, Finance and Governance at Westminster Business School and former Vice President of Global Risk Management at Deutsche Bank, believes that the current instability in Bitcoin prices will not last when institutional investors enter the market:

“Many folks seem to have been surprised by Bitcoin’s recent increase in price, first to ten thousand dollars and then, in rapid order, to eleven thousand dollars.However, these increases were to be expected given the cryptocurrency’s recent momentum. As the end of the tax year approaches, many Americans need to invest their annual pension contributions and Bitcoin is the next ‘hot stock’ to buy.

“Clearly speculative money is flowing into Bitcoin, driven by relentless media coverage and, of course, meteoric price increases but this should not lead us to assume that extreme price volatility is a permanent feature of Bitcoin. The entry of institutional investors into the market will bring a longer term perspective to the asset class and they will likely stabilise prices over time through their use of derivatives. As frustrating as it might be, sometimes the best thing to do in a fast moving market is nothing.

“My advice is to wait for institutional investors to enter the market. Being known as a market participant I’m often pigeonholed on Thanksgiving by relatives and friends who want to know my view on companies they’ve read about in newspapers or heard of about on television before the holiday. This year’s Thanksgiving table conversations were about the cryptocurrency, and the most asked question was whether it was too late to buy.

“Serious investors thinking about buying Bitcoin ought to wait for institutional investors to enter the market as they’ll likely stabilise Bitcoin’s wild price swings.There are already signs this process is beginning as both the Chicago Mercantile Exchange (CME) and Chicago Board of Options Exchange (CBOE) have announced they’ll offer Bitcoin linked futures by the end of 2017.

“The creation of derivatives is an important development, since presently Bitcoin is only a tool of speculation. Investments, by contrast, take place in what’s called a ‘complete market’, or one that offers derivatives allowing investors to protect themselves against drops in price. Once these financial products are in place we’ll likely see a wave of money from institutional investors enter the market, all chasing a limited supply of Bitcoin.”