Even though bitcoin’s price jumped by more than 1,400 percent in 2017, observers have yet to come up with a good explanation for its rise.
Some claim bitcoin’s price is a function of its media coverage. Others point to mining statistics as possible precursors to its trajectory. Still others say that bitcoin whales profiting from strategic buys and sells are responsible for the cryptocurrency’s wild and erratic price swings.
Through the fog of explanations, however, a couple of consistent themes have emerged.
Here are two.
The Importance of Asian Markets and Investors
Perhaps bitcoin’s founding myth, which credits Satoshi Nakamoto - a libertarian Japanese computer scientist and cryptographer - with inventing the cryptocurrency has something to do with it.
Even as the West is still mired in existential debates about the role of cryptocurrencies in its economy, Asian investors and traders have enthusiastically embraced them. Exchanges in Asia have always accounted for a bulk of trading volume in bitcoin.
For example, according to data from www.bitcoinity.org (below), Bitfinex and Okcoin, based in Taipei and China, respectively, accounted for a major chunk of bitcoin trading volume.
In 2017, they emerged as a potent force for determining prices for other cryptocurrencies as well. For example, Bithumb, a South Korean exchange, steadily increased its share of cryptocurrency trading markets through 2017 and has the largest trading volumes for certain cryptocurrencies, such as Ethereum and Ripple. In fact, recent gains in altcoins were fueled by Asian investors.
While most exchanges function 24X7, trading sentiment in Asian markets seems to set the trend. In fact, Asian exchanges have become a predictor of sorts for the day’s price movements.
For example, the domino effect of a surge in Ripple’s prices at Bithumb was followed by its ascent to becoming the world’s second-most valuable cryptocurrency the next day. (See also: Bitcoin Price Slides Further; Ripple Builds Lead Over Ethereum.)
Bitcoin Futures: The Tail Wags The Dog
Typically, futures prices predict spot prices. The introduction of bitcoin futures was expected to have a similar effect. A flood of institutional investors, who add liquidity to the markets and are invested for the long term, were expected to stabilize bitcoin’s price movements.
But that hasn’t happened. There was an initial pop in prices but futures contracts have largely followed spot prices. This is mainly because trading volumes for futures contracts represent an extremely small fraction of liquidity in bitcoin markets.
For example, bitcoin futures traders at CME and CBOE exchanged contracts worth $94.65 million by close of trading on December 29, 2017. Bitcoin had 24-hour trading volumes of $12.4 billion on the last day of December. According to billionaire Mike Novogratz, who has invested 30 percent of his fortune in cryptocurrencies, institutional investors have had an “interesting” response to his crypto-only hedge fund.
That said, the move towards institutionalization of bitcoin is following a steady and tested path. Bitcoin ETFs are expected to be next in line. The big daddy of investment banking, Goldman Sachs – which also acts as a clearing agent for bitcoin futures – is expected to set up a trading desk for it in June. (See more: Goldman To Set Up Cryptocurrency Trading Desk By June 2018.) The cryptocurrency’s volatility should attract clients hoping to arbitrage the difference across various futures and spot exchanges.
Investing in cryptocurrencies and other Initial Coin Offerings (“ICOs”) is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author owns 0.001 bitcoin.