Virtual Currency Bitcoin Faces Real World Risks

The Bitcoin fairies were at it again this week, first tempting the innocents with the big round $1000 number then smacking them to the tune of a 23% decline when they got too greedy. The price action in this market reminds me of the pork belly market in Chicago in the 1970’s. No one knew what they were, but everyone liked telling their friends that they were trading “bellies”. This market was even joked about in the classic movie “Trading Places”.

That was, of course, before speculative greed lured them in too far. Like Daedalus nearing the sun wearing his wings held together with wax, these belly specs were hit hard by professional traders, suffering insurmountable losses, margin calls and rumor had it in some cases, being delivered an entire boxcar full of frozen bacon.

These “frozen bacon” speculators lost because they didn’t know the market they were trading and most of all, they didn’t know and respect the major players who made a living trading the very instruments these traders joked about with their friends at the country club on the week-end.

I think some Bitcoin traders share the same traits as the pioneer pork belly traders of the 1970’s. They may know nothing about the currency they are trading. Nothing about the major players on the other side of the market and nothing about the power of the central banks who have more money than they do and can knock them for a loop whenever they feel threatened.

If you’re a speculator who bought the Bitcoin because you liked saying cryptocurrency then you received a wake-up call this week when the market lost more than a fifth of its value. The loss may have been on paper if you bought early and held on, but if you chased the market, entering after December 21 then you could be trapped at or near an all-time high. This could get ugly for you over the near-term if the same forces that drove the market down this week, continue to emerge as the Bitcoin’s worst enemy over the next several weeks.

No one is certain why there is so much volatility in the Bitcoin market at this time. Most analysts agree that it may have something to do with the strong dollar and the relative weakness in the other major currencies. This being said, no one is knocking you for buying a currency or currency equivalent because you think it represents value at a time when there is uncertainty in the marketplace.

However, at some point in the maturation process of the Bitcoin market, you have to be aware of the risks, the trade-off and the correlations that make the currency move up and down. Some say recently there has been a strong correlation between Bitcoin and the Chinese renminbi. For example, Chinese investors looking to move money out of China ahead of a rumored further devaluation of the renminbi may have bought Bitcoin as a hedge or a safe haven assets.

That may have been the prudent move by professionals, but if you speculated that the upside momentum would continue forever then you had your head handed to you this week when China told state-owned banks to sell U.S. Dollars. This rallied the renminbi and tanked Bitcoin.

My point is that the investment world has allowed the Bitcoin to exist alongside the other major currency. It has been allowed to fluctuate like any other developing currency without any major incidences. However, if the Bitcoin traders want to play the game against the big boys like the People’s Bank of China then they’re going to have to play by their rules and they have more money. And in the game of currency trading, if you have more money than your enemy, you tend to win.

Congratulations on your strong performance, Bitcoin, in 2016, but welcome to the big leagues in 2017 when the major players may be gunning for you. The Forex markets don’t hand out participation trophies to the players, you either win or you lose and based on the price action the first week of the new year, I think you’re going to have to be ready from a few major battles if you think this market can sustain a rally over $1000.

If smart money is behind the Bitcoin rallies in 2017 then the battles will be fair, but if the moves are being driven by speculative capital then Bitcoin buyers will be led to slaughter this year like the hogs who gave us pork bellies in the 1970’s.