We all heard what JP Morgan had to say about bitcoin, and it was not pretty. However, as we may have also observed, bitcoin has gone through a meteoric rise in the past few months. This has led its critics to retract their statements and invest in the cryptocurrency. JP Morgan has gone through a similar shift. Their CEO, Jamie Dimon, stated that the cryptocurrency is a fraud and it will eventually fail to have any substantial value. He was so strongly opposed to bitcoin that he stated that he would fire any of his traders who invested in it.
In the wake of the planned release of Bitcoin Futures on December 18th, which will be traded on CME and CBOE, JP Morgan’s chief strategist, Nikolaos Panigirtzoglou, has stated:
“introduction of bitcoin futures has the potential to elevate cryptocurrencies to an emerging asset class”
The statement starkly contrasts with that of the CEO’s. One might think that all is good for bitcoin and it is destined to become to new standard in the financial sector. However, that is not the case. Panigirtzoglou provides a detailed analysis of the cryptocurrency market and through comparison with other notable trade markets, explains the problem. He explains, "if the price of Gold increases, then it is pre-determined that the increase will be accompanied with an increase in the net flow in to the gold market. Therefore, as the price increases, more people invest in it and its value increases and the whole market grows."
In the case of cryptocurrencies, such as bitcoin, the net flow is basically a function of the coin generation algorithms. These algorithms are limited, and there comes a time that it will get excessively difficult to mine bitcoin. This would consequently make it unviable to mine new bitcoins and the net flow into the bitcoin market will decrease.
As the supply of bitcoins decrease, the increase in price will be unjustifiable. This will give rise to speculations and bubble comparisons. Speculation leads to destruction, as evident from the notable stock market crashes in the last century. Unless this hurdle is dealt with, bitcoin has a bleak future.
Other factors are also involved in the increase of the value of bitcoin. These factors include public acceptance as well as the use and acceptance of bitcoin by the merchants as a mode of payments. However, these factors do not play as big of a role as supply does when it comes to trading market.
Shorting bitcoin will be made even more easier with the release of bitcoin futures. Investors should be excessively vigilant while trading bitcoin. The movement of bitcoin cannot be fully predicted, and even if a small fraction of the institutional and retail flows are redirected to bitcoin, then a more meteoric rise in the price can be expected.