Bitcoin first launched in 2009, and was developed by its iconic founder Satoshi Nakamoto, an elusive persona that could be representative of several different organisations in which Bitcoin was developed at first, as a philosophical inquiry as to the value of currency and virtual currencies, and also to avoid govt scrutiny of the movement of capital, in addition to avoidance of transactional fees generated from global banking industries and national taxes. Since Bitcoin also allowed users complete anonymity, similar to what the numbered account in Switzerland had been until 2009, when several international govt agencies, led by the Obama Administration, made a crackdown to restrict anonymity in order to increase government scrutiny. (Note: up until 2009, anyone in Switzerland could walk into a bank and open a numbered account without proof of identity; however after 2009, most numbered accounts were either closed or turned into regular bank accounts).
After the closure of numbered accounts in Switzerland, Bitcoin was launched in the same year, which allowed a new online transactional way for users to be able to transfer or hold funds, allowing them complete anonymity, bypassing the Federal Reserve, International Monetary Fund (IMF), London Interbank Offered Rate (LIBOR) and govt control of money.
"Bitcoin will be stopped and become worthless."- Jamie Dimon, CEO of JP Morgan Chase
"Nobody can stop Bitcoin." - Bill Gates
In 2015, a new virtual currency was launched, Ethereum, and an Ethereum Alliance, backed by JP Morgan and Microsoft amongst many other organisations gave new resources, funding for research and financial backing to rival Bitcoin soon after.
Obviously there are a lot of cryptocurrencies that have launched since Bitcoin, including Litecoin, Zcash, Dash, Ripple, Monero in addition to Ethereum et al. There are new cryptocurrencies cropping up every day, but how safe are these exchanges and trading platforms?
Tulipmania of the 17th century in Europe. By 1634 the demand for tulips created a boom, driving prices sky high. The price of one tulip bulb was 10x the annual pay of a skilled craftsman.
Although blockchain is quite secure and stable, and prevents hackers from altering information on the blockchain network due to the collective dissemination of transactional information, the problem is with the instability of virtual currency trading platforms. One of the earliest and largest Bitcoin exchanges, Mt. Gox, suddenly shut down in Feb 2014, and users collectively lost $473 million in Bitcoin. Previously, GBL, a bitcoin trading platform based in China suddenly shut down the year before, and customers lost $5 million in Bitcoin.
DAO was hacked in 2016, leading to $55 million in missing funds of ethereum (ETH) and in this year, other hackings, such as CoinDash’s $7 million in lost funds of ETH and Parity’s security breach leading to a $32 million heist along with individuals whose accounts were targeted and a total of $225 million of ETH has been stolen from customers this year alone.
Hackings of cryptocurrency exchanges: a common event in our contemporary era.
Cody Brown, founder of IRL VR production studio recently gave a first hand account of how his bitcoin became compromised on Coinbase after he had been targeted by individuals who had ported his Verizon mobile number, reset his password, added new devices to his account and took off with all his bitcoin.
The problem with cryptocurrency exchanges is that they do not insure nor guarantee a return of funds for fraudulent activity. Unlike a traditional bank account or stock exchange account, there is no way to recover those lost funds because the cryptocurrency exchanges do not financially back lost products, although if you are a US resident, some exchanges such as Coinbase insures your USD wallet via FDIC for up to $250K from a breach of Coinbase’s physical or cyber security but does not cover losses as above such as in Cody Brown’s case from a personal account being compromised.
So what is going on with Bitcoin? To understand Bitcoin’s current price action, its history may present some insights.
Here is a chart of Bitcoin in 2013 - although it may look eerily similar to what is currently going on with Bitcoin now. In a period of less than 2 months, Bitcoin gained 968.3% from 120.11 to 1163 during October 7, 2013 to November 30, 2013. It then entered a bear cycle in the next year and a half and fell to 152.40 on January 12, 2015 where it began a period of consolidation.
After Bitcoin stabilised after the downcycle, a couple of anomalous events occurred in the week of Jan 12 and Nov 2 2015 in which a large volume of Bitcoin was exchanged, suggesting something about to happen. Usually I see transactions of this sort to imply multiple international organisations transferring funds from one bank to another. Then from May-June 2016, we see a strong precursor to an uptrend. These green bars of uniform size without a long tail or head on the weekly chart suggest that many different financial institutions, hedge funds and investment banks suddenly began steadily buying Bitcoin during these two months in anticipation of an uptrend.
This is the Bitcoin/USD chart at present. In a period of one year, Bitcoin gained 895% from Aug 2016 to Aug 2017, very similar to the movement from Bitcoin in 2013, when it gained 968.3%. If we examine the fibonacci retracement line, currently Bitcoin is in the general area of the 1.618 line at 4381.78. If Bitcoin isn’t able to hold this area for the next two or three weeks, this could suggest a similar price/action history set in 2013, and could signal a potential pullback to the 100% fibonacci level at 2925.12. However, this week’s candlestick formation is not yet complete, but a combination of the long head from last week’s formation with this week’s formation could be the determinant in what happens to the price of Bitcoin for the next year. If Bitcoin were to enter a potential downtrend, then I extrapolate the next opportune time to buy Bitcoin would be Jan 2019.
Warren Buffett has some time proven stock advice: Buy low, sell high. Obviously, a lot of people make things much more complicated than they actually are and make multiple unnecessary transactions. Although currently there is psychological momentum of cryptocurrencies, and the media is reporting about all these newly minted multi-millionaires who had invested just $5-10K of Bitcoin in the early days, and now have more than $2-3 million worth of Bitcoin, it is important to remember that most of these early innovators who bought Bitcoin lost their entire capital during the Mt. Gox hacking and shutdown, which was the largest exchange at the time. Currently, Bitcoin is at an all time-high and it would be taking a substantially large risk for people to jump on the cryptocurrency bandwagon and start investing large amounts of capital in Bitcoin at this present time.
Now, let’s look at Ethereum.
Ethereum had a phenomenal uptrend from April to June 2017, and in a period of 2 months, had a gain of 858% from 48.94 to 420. (Sound familiar?) However, currently, on the daily chart, ETHUSD seems to be making a double mountain formation, which may be a possible downtrend indicator. In the next month, if ETH does not hold the bottom support around the 226 area, then this could signal a further decline.
As cryptocurrencies become more regulated, and subject to govt scrutiny, it will become like any other currency. However, the difference is that cryptocurrencies are not backed by insurance, such as FDIC, so the disappearance or shutdown of an exchange will result in a complete loss of funds. This is the same for (initial coin offerings) ICO. Quite frankly, I am not a fan of ICOs and think it’s taking on an unnecessarily large risk for temporary, volatile and unstable gains. Of course, if a company’s stock isn’t doing particularly well, it’s easy to think for investors to have bought Bitcoin or ETH instead, especially during its all time highs. This is usually called “the missing out” psychology of investors, and they begin to invest large amounts of capital after the uptrend momentum has already occurred. The best time to invest is usually after the consolidation period, when the stock has been moving sideways for a while and begins to show signs that an uptrend might occur. As Warren Buffett says: Buy low, sell high.
Disclosure: I have no holdings in cryptocurrencies, so have no conflict of interest in writing this article.
Disclaimer: This article is for educational purposes only and should not be taken as any investment advice.