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Market Digest Nigeria

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To buy or not to buy as bitcoin price bubbles

bitcoin

Following a surge in bitcoin price, social media has created a buzz around the most popular cryptocurrency, pushing it to become one of the most searched words on google search engine of late.

LONG READ... CBN CRYPTOCURRENCY BAN: What is the noise about?

The bull run in bitcoin price has increased the public interest in bitcoin despite the several warnings coming from Central Banks around the world, including that of Nigeria. As a Nigerian, the lack of job and low assurance of steady income has made bitcoin the go-to for quick wealth.

As bitcoin price continues to rise, CBN tied the digital asset to gamble, a fraudulent scheme that will leave many victims in its wake. But Nigerians have a long standing history with quick money making schemes like MMM and Loom.

Despite having their hands burnt indulging in MMM and Loom, the economic condition in the country has made many Nigerians resilient and hopeful when faced with high risk schemes – so it’s understandable how fast bitcoin’s popularity rose in Nigeria.

As at December 2020, Nigeria was bitcoin’s second largest market on Paxful, behind the United States. And that was when bitcoin was trading at above $20,000 per bitcoin. Now it trade for over N21 million – there’s no better advert or call to action than that.

To buy or stay far away

The current standing of bitcoin and the buzz around its impact on wealth creation has got many Nigerians salivating, hoping and planning to join the ride into quick wealth creation. Ripples Nigeria had reported that bitcoin’s recent surge made 94,000 holders millionaires.

So as people contemplate, weighing the advise of CBN’s governor, Godwin Emefiele, on one hand and staring at the gain bitcoin holders are swimming in on another hand, the question in their minds begging for answer is: ‘should I stand by the pool side or dive in and hope not to sink’.

This article will provide some factors that will help prospective bitcoin holders answer their own question.

Who controls bitcoin’s value

First, it is important to note that the surge in bitcoin is being enjoyed by first movers, institutional investors and corporate organisations: all of which are large holders.

Bitcoin’s value is largely dependent on them. The decisions they make with their bitcoin affect late comers. They hold all the cards, and when they dump, the value of bitcoin drowns. These category of holders are known for pump (large investment) and dump (large sell-off).

Bitcoin was created in 2009 by Satoshi Nakamoto due to the financial collapse in 2008, hoping it helps individuals and companies avoid traditional banking infrastructure during transactions, but bitcoin itself has one of the most volatile trading histories when compared to other cryptos.

And whenever bitcoin value crashes, it is always due to large holders protecting their profit once bitcoin hits unprecedented surge – does that ring a bell? Large holders engage in bitcoin as a cover against inflation on fiat to store value, while an individual (small holder) just wants to make quick gain without proper foresight.

Large holders standing are usually caught between a short-term and long term position because their bet on bitcoin price rising is without fact, just boldness. That’s why between 2011 and 2020, bitcoin crashed more than five times – what the crashes have in common is, once bitcoin experiences a price bubble, investors dump their holdings for profit.

Bitcoin crash history

In 2011, bitcoin’s price rose to $32 in three months from $1 in April, by November of the same year, that rise had shrinked to $2. Between 2012 and 2013, bitcoin price hovered around $13, before rising to $220 by April 2013, but the surge was short-lived as it declined $70 in mid-April.

In December of 2013, it rose to $1,156.10, but three days later, bitcoin crashed to $760 in same month. According to Investopedia, bitcoin from then on experienced a multi-year slump, selling at $315 at the start of 2015.

Two years later, bitcoin was trading at $1,000, but dropped in January and February 2017, before surging from $975.70 at the last week of March to $20,089 on December 17. In the next two years, bitcoin was said to trade in horizontal price movement (stuck between decline and rise).

But in June 2019, it was trading below $10,000 before further declining to $7,112.73 in December of same year. But thanks to COVID-19 pandemic creating uncertainty around stock markets, the cryptocurrency became a safer option for institutional investors and high networth individuals, pushing the cryptocurrency value from $7,200 which it started 2020 with, to above $20,000 in December last year (nine months after falling by 50%).

Now in 2021, the new price bubble which has pushed the cryptocurrency to about $57,000 as at the time of filing this report, has got non-bitcoin holders hoping to join the ride without having a sense of history and what price bubble does to the cryptocurrency market and the cryptocurrency value.

Don’t be the last fool

As the distribution of vaccines across the world increases and stock markets rebound following reboot of businesses, institutional investors and high networth individuals will start eyeing their first love, bonds offerings from corporations and governments across the world and other regulatory-backed investment options

When they decided to pull their investment to protect their profit amid the unprecedented price bubble of late 2020 and first half of 2021, the dump will crash the value of the cryptocurrency, so late comers hoping for a quick return will have their hands burnt, becoming the last fool.

Entrance of Tesla, Elon Musk, Microstrategy, Mastercard and Apple have given the cryptocurrency some sense of safety, and there have been projections that the cryptocurrency will hit $60,000 (and its nearing that already) and $100,000 as corporations take interest in the cryptocurrency, but before it gets to $100,000, the cryptocurrency will hit a rock due to resurgence of other credible investment options.

So if at all, you intend to invest in the cryptocurrency, ensure your capital is one you can afford to lose or exchange for a long standing position or longterm. As this price bubble is heading for a crash: guess who’s behind it, not Lewis Hamilton, but large holders.

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