Originally published by Guppytraders
(Bitcoin) trading, and the capital allocated to it, remains a very small part of the multitrillion dollar equity markets. Its an even smaller part of the much, much larger derivative market.
The key problem with Bitcoin and other crypto currencies is that they are fiat currencies in the true sense of the word. A fiat currency relies on investors confidence for its value. A fiat currency is not backed in gold or some other asset. Most world currencies are fiat currencies, but they are backed by sovereign states. It is rare for a sovereign states to default on debt, which in turn leads to currency collapse.
Crypto currencies do not have the support of sovereign states. In fact some sovereign states – China – refuse to recognize these as legitimate currencies. This is the most significant risk in crypto currency trading. At any time a sovereign state like the US may ban or prohibit crypto currency use and trading and thus render all contracts immediately worthless. This makes the crypto currencies suitable for short-term trading with exceptionally good risk management.
The listing of Bitcoin contracts on the Chicago Futures exchange does not legitimize Bitcoin. These contracts can only be cash settled in US dollars. The contract cannot be converted to Bitcoins on expiry. This gives an indication of the level of confidence in the currency. Creating a Bitcoin futures contract legitimizes and regulates the trading activity, but it does not legitimize Bitcoin as a currency.
Crypto currencies are the currency of choice for money laundering, hackers, terrorists and criminals. Governments will not stand by and allow these crypto currencies to evade the regulations around these activities. There is a high risk that sovereign executive action will destroy the value of these Bitcoins.
This trend is a parabolic curve. The trend is best described using a segment of an ellipse, mistakenly called a parabolic curve. Once the three anchor points are set, the position of the curve does not change. The trend starts off slowly then accelerates very rapidly until the activity on the price chart is almost vertical. Price will soon move inevitably to the right of the curve. This usually signals a rapid retracement of 50% or more.
Alexandre Dumas 1850 book The Black Tulip should be read by any person thinking about trading Bitcoins. If anything, the situation is worse now than Dumas describes in his day, when tulip futures were actively traded on the Amsterdam stock exchange.
Bitcoins will not impact the stock market other than to remove some speculative capital from the equity market. However the amounts are small when compared with overall market activity.
Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders, which can be found at www.guppytraders.com. He is a regular guest on CNBC Asia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe. He is a special consultant to AxiCorp.