Bitcoin rebounds

At the end of June 2019 bitcoin rose above 13,000 dollars, after starting the year below 4,000. The rebound took place in a few months and drew attention back to cryptocurrencies, partly because of the interest aroused by the Libra project, the digital currency Facebook had unveiled a few days earlier, which put the debate on digital money back in the headlines. The rebound came after a very low start to the year, and was followed closely by enthusiasts and sceptics alike.

A move of this size deserves an explanation, but also a warning. Crypto-asset markets are young, less regulated than traditional financial ones and react strongly to news and to investor mood. To understand what a jump like this means, it helps to separate what is known, a price rising quickly, from what is not known: whether it will hold, and for how long. In an asset like this, large moves up and down are part of its usual behaviour, not an exception.

A very wide move

Going from under 4,000 to over 13,000 dollars in a few months illustrates what high volatility means: prices can multiply, but they can also fall just as quickly. Volatility is not a passing feature but a property of an asset whose value depends very directly on expectations.

Bitcoin does not generate income or interest payments, and its price depends largely on supply and demand at any given moment. Unlike a company, which distributes profits, or a bond, which pays a coupon, there is no stream of money from which to calculate a reference value. That makes it very hard to know whether a price is high or low and explains the breadth of its swings. Unlike a deposit or a bond, there is no issuer to claim against and no stream of payments from which to judge by simple criteria whether the price is reasonable.

The Libra effect

The debate over Facebook’s project put digital currencies back at the centre of attention. When a company of that size takes an interest in digital money, many read it as the concept gaining legitimacy, and that can attract new buyers, with the resulting effect on the price of existing cryptocurrencies.

Part of the rebound reflected that interest, and not necessarily a change in the real use of bitcoin. Moves driven by enthusiasm can reverse when the mood of the market changes, when regulatory restrictions appear or when attention shifts to another subject. The experience of earlier episodes advises against mistaking an attractive narrative for a solid foundation.

A note of caution

This note is not a recommendation. Anyone considering holding crypto-assets should do so aware of their risks, with amounts they can afford to lose and knowing how they are taxed, since transactions can create tax obligations that are best understood in advance and declared correctly. A good rule is that no decision about this type of asset should jeopardise the stability of the family or the company if the outcome were unfavourable.

And a high price should not be mistaken for a guarantee of the future. Before taking any decision, it is worth speaking with an adviser, checking the custody and security of the chosen means and weighing what share such a position would have in the whole of one’s wealth. The prudent course is for the decision to respond to a plan, and not to the urgency of not being left out.

A price that rises fast is not the same as an investment without risk.

This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.