Bitcoin races past US$13,000 as worries spike about a dangerous bubble

PUBLISHED : Thursday, 07 December, 2017, 7:48am
UPDATED : Tuesday, 12 December, 2017, 8:27pm

Bitcoin extended its rally on Wednesday, breaking above US$13,000 to a record high despite questions about the cryptocurrency’s real value and worries about a dangerous bubble.

“We are in the throes of a bubble market, and one of the characteristics of a bubble market is that there is no way to know when the bubble will burst”
Mick McCarthy, CMC Markets’ chief market strategist

Bitcoin received a boost after Friday’s announcement by the main US derivatives regulator that it would allow CME Group Inc and CBOE Global Markets to list bitcoin futures contracts.

The move opens the door to added regulation but also more mainstream adoption, as bitcoin futures and other derivatives would make it easier to trade the new asset class.

“Simply the perception in households around the world that the CME and the CBOE are providing legitimacy to bitcoin is really what is driving the massive rally here,” said Karl Schamotta, director of global product and market strategy at Cambridge Global Payments in Toronto.

Bitcoin’s ascent of over 10-fold from below US$1,000 at the start of the year has drawn regulatory scrutiny around the world.

Some high profile individuals such as Nobel Prize-winning economist Joseph Stiglitz have said the cryptocurrency should be outlawed.

“It took a long time to establish the methodology and the way bitcoin was traded. The original appeal came from the fact they were unregulated. However it’s clearly moved out of those shadows and into centre-stage,” said Mick McCarthy, CMC Markets’ chief market strategist in Sydney.

“We are in the throes of a bubble market, and one of the characteristics of a bubble market is that there is no way to know when the bubble will burst.”

The current craze for bitcoin, and cryptocurrencies in general, have been likened by some to the 17th century Dutch tulip mania and more recently the dotcom bubble.

“If you look at this sort of pattern it has repeated itself many, many times. The only way it ends is when sentiment shifts and that’s a deeply unpredictable thing,” Schamotta said.

Why bitcoin fever is a bubble waiting to burst

Bitcoin was up 12.42 per cent to a record US$13,127.01 on the Luxembourg-based Bitstamp exchange.

“There is a lot of money flowing into bitcoin right now, mostly motivated by “fear of missing out” and greed,” said Leonhard Weese, president of the Bitcoin Association of Hong Kong.

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The dollar edged higher against a basket of major currencies to hit a two-week high on Wednesday, as market participants grew more optimistic about lawmakers’ progress on US tax legislation.

The dollar index, which measures the currency against six rivals, was up 0.18 per cent at 93.547.

“The dollar is finding some support on expectations that Congress is going to pass tax legislation sometime this year,” said Sireen Harajli, FX strategist at Mizuho in New York.

The US Senate voted to go to a conference committee to resolve differences between its tax legislation and a rival version passed by the House of Representatives, moving the Republican-led Congress a step closer to a final bill.

The dollar index moved higher after data from a payrolls processor showed US private-sector employment growth eased in November even as the manufacturing sector added the most jobs in at least 15 years.

The dollar was 0.36 per cent lower against the Japanese yen.

“A flight to safe havens is underway at the moment,” said Schamotta.

“The potential for a US government shutdown is intersecting with worries about the long-term geopolitical risks associated with Trump’s recognition of Jerusalem as Israel’s capital to push money into the yen,” he said.

President Donald Trump abruptly reversed decades of US policy on Wednesday and recognised Jerusalem as the capital of Israel, generating outrage from Palestinians and defying warnings of unrest in the Middle East.

Donald Trump declares Jerusalem Israel’s capital as region braces for violent backlash

The yen tends to benefit during geopolitical or financial stress as Japan is the world’s biggest creditor nation and there is an assumption that Japanese investors will repatriate funds should a crisis materialise.

On Wednesday, Trump also raised the possibility of a US government shutdown by week’s end – blaming Democrats for that possible outcome – one day before he is due to host Republican and Democratic congressional leaders for talks on a spending bill.

Sterling touched a one-week low in volatile trading amid growing concerns that a Brexit deal may be unlikely before next week’s key European Union summit.

The Canadian dollar fell against its US counterpart after the Bank of Canada held interest rates steady and showed enough caution to dampen expectations for a hike early next year.