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Are The Crazy Rides Of Bitcoin Controlled By The Invisible Hand Of The Market?

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Here we are again. Those who doubted Bitcoin (BTC) and forecasted the age of cryptocurrency will soon be over need to think again. Bitcoin showed renewed strength by gaining 23% in the last week only. Is the shiny knight back?

The recent days have been very good for Bitcoin and its investors. As a result, the price of the BTC unit has reached and extended past $7,000 US. At the end of June it was ‘only’ $5,818 US.  It is too early to say if the rollercoaster is back again. Still, it has dropped a long way from nearly $20,000 US in mid-December last year. Additionally, the level of $7,300 US is a strong resistance level in terms of stock exchange technical analysis.Therefore, it is probable that the rate will remain on the current level for some time. Don’t treat this as a piece of investment advice, as BTC has developed against projections.

There is Good News

So what actually influenced BTC in recent days? Monday July 16 brought few pieces of news that may shed light on the recent rally:

Firstly, BitPay announced that its acquisition of three providers (Keystone Capital, Venovate Marketplace and Digital Wealth) was approved by the U.S. Securities and Exchange Commission and by the Financial Industry Regulatory Authority. The next day it was denied by the company, but apparently it didn’t impress BTC investors.

Secondly, the New York Department of Financial Services (DFS) said it has granted a virtual currency license to a few cryptocurrency payments processor (check out the full story by Reuters here). Among them is BitPay, a vivid operator which has partnerships with such companies as PayPal, Microsoft, and Warner Bros. Records.

Thirdly, the Financial Stability Board, an advisory body for the G20 countries, announced it has developed a framework and identified metrics to monitor the financial stability implications of crypto-assets markets. At first view, it may not be considered as very positive information, as the majority of governments are quite sceptical about cryptocurrency. However, the market is hungry for (positive!) regulations and considers them as a way to be regarded as more ‘civilized’ and safe.

Last but not least, Blackrock’s CEO, Lary Fink, revealed that the world largest asset manager has established a working group to investigate bitcoin, as well as other cryptocurrencies, and blockchain technology. However, its clients have a zero interest in crypto-investments, he added at Bloomberg TV.

Apparently, these events were enough fuel to lift bitcoin’s rate from the valley where it landed in Q2.

What Economic Theory  Could Help us with Bitcoin Projections?

Regarding the classical economy and the stock exchange technical analysis, the price of an asset reflects its actual and real value. On the other hand, it is known that some commodities may be under- or overvalued. The gap between the real value and the quoted value is an ideal space for speculation.

Nowadays, neo-institutional theories of economics have gained in popularity, due to the fact that they explain people’s behavior better. These theories put the emphasis on such phenomena as information asymmetry, opportunism in trade exchange (dishonesty) or herd behavior.

Recap of Some Uncomfortable Facts

In mid-2018 the skyrocketing of Bitcoin instead of enthusiasm created scepticism and additional questions. The previous ride seemed to be stimulated not only by the fact the market started to believe in the exceptional value of the cryptocurrency, but perhaps also by some opportunistic practices.

At the end of 2017, the U.S. Commodity Futures Trading Commission subpoenaed two major cryptocurrency exchanges – Theter and Bitfinex. Although they stated in Bloomberg that they routinely receive legal process from law enforcement agents and regulators conducting investigations. Last month, an academic paper by John Griffin and Amin Shames from University of Texas was released, showing the mechanism of this manipulation.

Additionally, a few weeks ago the US Department of Justice has opened a criminal probe to determine if the prices of bitcoin were manipulate by traders, as reported by Bloomberg.

This is a change when assessing the cryptocurrency. Nearly all over the world, regulators have been looking at Bitcoin negatively since crypto gained its attractivity, arguing that they are not transparent and, because of this, Bitcoin may be used for illegal purposes. But, for the first time, we hear serious reports that Bitcoin is not so pure as we thought.

This is nothing new. Every type of assets are threatened by frauds and the financial industry is used to fighting with them.

However, considering that the  cryptocurrency sector is in the early stages, the lack of regulations and dearth of valuation methods, when observing the recent ride of Bitcoin, the following question is relevant: are the BTC prices effected by the Invisible Hand of the Market (referring to Adam Smith) or have traders missed some information or have been mislead?

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