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Market Analysis – Bitcoin, Ethereum and the Cryptocurrency Market

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On 3rd November of this year, a historic milestone was reached when the cryptocurrency market capitalisation passed the US $20 billion mark for the first time in its history. This was hard on the heels of Bitcoin reaching a high-water mark of US $7,461 the previous day.
Although it has since dropped back a little, Bitcoin now has a market capitalisation of nearly US $122 billion. Even Ethereum, which has struggled recently whilst market support has piled behind Bitcoin, has rallied, and is now trading at nearly US $300 a coin, which represents a market capitalisation of US $28.3 billion.
What is driving the current cryptocurrency surge and is it sustainable?
In truth, the current price surge is really all about Bitcoin. Not only does it account for more than 60% of the cryptocurrency market in terms of market capitalisation, the volumes traded dwarf that seen for other cryptocurrencies, with Ethereum a very distant second. Essentially, other altcoins are now trading on Bitcoin’s coat tails, so that is where most attention needs to be paid to understand the current market position.
There are many who argue that what we are seeing in the market now is just a bubble and that a crash will occur sooner rather than later. That is certainly the view of legendary investor Warren Buffet who recently advised his Berkshire Hathaway investors to stay away from Bitcoin because the price is being driven by speculation, and cannot be valued properly because it is “not a value-producing asset.”
This is not the first time that Buffet has criticised Bitcoin. Back in 2014 when it traded around US $400 a coin, he stated that it was a joke to think that cryptocurrencies have any intrinsic value because they are just a way of transmitting money. Three years later, with the price of Bitcoin at record levels, we are still waiting for the predicted crash, although there has been plenty of volatility in the intervening period.
Buffet is not alone in being a naysayer. JP Morgan boss Jamie Morgan called Bitcoin a fraud in September, and promised to fire any trader at his investment bank caught dealing in the currency. Meanwhile billionaire investor Howard Marks has called it pyramid selling, whilst Saudi Prince Al-Waleed bin Talah predicts that Bitcoin will soon implode because it is not regulated.
Ironically, in the light of these views, one of the reasons for the current rise in the value of cryptocurrencies is because certain parts of Wall Street, at least, are now starting to take them seriously. Data recently published by financial research firm Autonomous Next showed that, since the start of the year, 90 hedge funds focused on digital assets have been launched in the US alone.
At the same time, the world’s largest options and futures exchange, the Chicago Mercantile Exchange, has announced plans to offer Bitcoin futures by the end of the fourth quarter, subject to regulatory approval.
This is seen as another step in the development of Bitcoin as a more established asset class, and potentially gives institutional investors a way of buying into the digital currency market.
There are other factors behind the current rise of Bitcoin as well.
In November the Segwit2X hard fork is planned, which, at least in the short-term, has a positive impact on the Bitcoin price. Those investors that do not expect Segwit2X to become the majority blockchain are investing in Bitcoin; paradoxically, those who are expecting it to become the majority are also investing in Bitcoin because that is the only way they will be able to buy the Segwit2X coin when it becomes available.
A further reason for the increased demand for Bitcoin and other cryptocurrencies is because of interest from Japan and the Far East. Bitcoin and digital currencies have now become mainstream assets on Japanese markets, and high profile institutional and retail traders have started to engage in Bitcoin and cryptocurrency trading. The Japanese Bitcoin exchange now accounts for 61.2% of global Bitcoin trading, more than double the trading volume of the US.
Questions may be asked as to why Ethereum has not seen the same rise in value as we have seen with Bitcoin, and, to a much lesser extent, with currencies like Litecoin.
One reason certainly is that Bitcoin has become such a big story that it has sucked demand away from other digital currencies. There are also ongoing hacking and security concerns about Ethereum. Last year an online hack saw US $53 million drained from one of their networks, and there are continued concerns that the blockchain is still vulnerable to online attacks.
There is also an argument that says that the Ether coin is actually less important to the Ethereum project than the blockchain itself and the concept of the smart contract. That makes the currency less subject to wide fluctuations and market sentiment.
On the positive side, some market analysts predict that it is a matter of time only. Wait a year or so and we will see Ethereum start to rise strongly in value like Bitcoin.
The current market boom for cryptocurrencies is all driven by Bitcoin. Whilst there is clearly evidence suggesting that institutional investor interest in the US and the Far East is now making digital currencies a mainstream asset, there is still plenty of speculation that the current price surge is a bubble and a crash may be imminent. Certainly it will be interesting to see what happens after the Segwit2X hard fork and whether that has any impact on the long-term price of Bitcoin and the market as a whole.
Whatever happens, this is likely to be afascinating market to follow in the weeks and months ahead.

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