The bitcoin bubble will burst: here’s how to play it

Spark Global Limited Reports:

The cryptocurrency’s price has soared far beyond its fundamentals, says Matthew Partridge. Here, he looks at how to short bitcoin.

One of my most successful tips has been shorting bitcoin. If you had taken my advice to sell it short in January 2018 (issue 880), you would have made a profit of £1,744 after closing the position in April 2019. I then suggested shorting it again in July 2019, which would have produced a small profit of £250 after the position was closed in January 2020. However, over the past year the cryptocurrency has been on a tear, rising from just under $7,000 at the beginning of April 2020 to the current price of $58,000. So is this surge due to a genuine shift in the fundamentals? Or will history repeat itself?

Many people clearly believe there have been two major changes in the fundamentals of the currency justifying not only the higher price but also further sharp appreciation. First, there has been a big shift in official attitudes to digital currencies, with central banks viewing them as the future of finance instead of a threat to their power.

This acceptance has been mirrored by investors with an increasing number of institutions, not just retail investors, starting to dabble in them. The various fiscal and monetary packages launched by governments in the wake of the pandemic have also fuelled fears of an inflationary surge. Bitcoin is seen as a hedge against price rises since unlike paper money it cannot be reproduced easily (there is a fixed amount of it).

Central banks are still wary

I’m not so sure. While several central banks have become a lot more interested in the general idea of digital currencies, especially in terms of facilitating payments, they remain deeply sceptical about bitcoin, with both the European Central Bank and the Bank of England calling for tighter regulation. Indeed, if anything the Bank of England’s plans for its own digital currency give it a strong incentive to discourage independent currencies such as bitcoin. At the same time, most of the corporate interest in bitcoin has been from a handful of hedge funds and technology companies such as Tesla (and you could argue that Tesla’s investment is a publicity stunt).

 

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