Bitcoin hits record $1200 high: Here's the outlook ahead

After being the top performing 'currency' in 2016, Bitcoin has rallied to all-time highs and is trading at around levels of USD 1220 on the CoinDesk Bitcoin Price Index.

The volatile currency, which fell from a high of over USD 1,100 to below USD 800 in January, has been enjoying its longest stretch above USD 1,000 since its inception back in 2008.

The currency has gained steam on the hopes that American entrepreneurs Cameron and Tyler Winklevoss will receive a green signal from the US government to create the first bitcoin exchange-traded fund (ETF).

Right now the market seems to not factor in chances of a possible failure to the twins application for an ETF.

As per a report by CoinDesk investor and serial entrepreneur Vinny Lingham and Spencer Bogart, former analyst with investment bank Needham & Co LLC, both are not much optimistic on the ETF approval.

Lingham sees a 10-15 percent approval chance and Bogart sees less than 25 percent of odds in favour of the ETF.

“A contract created by Bitcoin Mercantile Exchange, a cryptocurrency derivatives trading platform, to bet on the possibility of approval of the Winklevoss ETF, showed favorable odds of only 34 percent on Monday,” a Bloomberg report said.

Saurabh Agrawal, CEO and Co-founder, Zebpay, told Moneycontrol News conceded that while chances of the approval were low, a favourable decision would be a milestone for the entire Bitcoin ecosystem. "We may see Bitcoin prices touching USD 1500 very soon.”

He said that if the ETF is not approved/postponed, there will be a minor correction in prices -- consolidation towards the USD 1000-1100 level -- but added that it would remain largely rangebound for a couple of weeks.

Volatility

Volatility remains a major concern for serious long-term investors even as price fluctuations also allow speculators to try and make money off it.

As per the Bitcoin volatility index, its 30-day volatility against the US dollar (measured by standard deviation) has come down to 2.25 percent from levels of 16.11 percent back in 2011. But the currency has not able to sustain low volatility levels over a long period of time.

For comparison, the volatility of gold averages around 1.2 percent, while other major currencies average between 0.5 percent and 1.0 percent.

At the moment Bitcoin is used more as a speculative asset and not as a medium of exchange like fiat currencies.

“A very volatile price of the currency (exchange rate) does not enhance confidence and acceptability but will rather attract speculators and further increase price volatility,” a report by SWIFT Institute said.

Unless it is used as a currency to pay for goods and services, it won’t be able to compete with the US dollar or any other stable currency for that matter.

Bitcoin investment risk

The investment risk of bitcons against other asset classes remains quite significantly high. Crude oil and bonds are the only other instruments that have come near to the investment risk of Bitcoin.

Scenario in India

While the Reserve Bank of India is upbeat on reaping benefits from blockchain, the underlying software that empowers digital currency, it remains highly pessimistic on Bitcoin.

Yesterday at an event RBI deputy governor Rama Subramaniam Gandhi said, "Blockchain, the foundation for bitcoins-like innovations, is touted to be the death knell of currency. I believe its potential is being overstated. We can see that in these types of solutions for virtual currency, there is no central bank or monetary authority. They pose potential financial, operational, legal, customer protection and security related risks."

The central bank has warned consumers about the risk investing in Bitcoin pose and had said that those putting money in virtual currencies are exposing themselves to potential financial, operational, legal, customer protection and security related risks.

In order to help people understand about virtual currencies and self-regulate the industry, Bitcoin startups Zebpay, Unocoin, Coinsecure and Searchtrade have launched Digital Asset and Blockchain Foundation of India (DABFI) and aim seeks to work alongside regulators to bring more clarity and credibility to cryptocurrencies.

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