Behaviour of a Bitcoin


“Bitcoin” the buzz word in 2017. In this editorial we are not going to go into the origins of Bitcoin, that information is easily accessible over the internet. We would rather deal with the anticipated behaviour of a bitcoin. Since their inception around 2009, they were most popular in the technological circles among techies. But, recently they have been in the spotlight because of the astonishing growth rate witnessed in them. Once news agencies all over the world started publishing their news on the front page. Public started noticing them, this led to the increase in their demand. Everyone desired a piece of the pie. The recent growth in them would put most of the other investment opportunities to shame.

What’s next for Bitcoins is the question going through the minds of many people. Will it keep on going up infinitely, will it turn into a bubble or will it follow the trend of a usual investment avenue like an equity stock. History is not unfamiliar with the examples of investment bubbles bursting and leaving many people especially the masses penniless. Infinitely going up seems like an over exaggeration of belief in them. That leaves us with two choices which are both very much possible. We may see the bubble of Bitcoin burst very soon or it may keep on following the behaviour of a typical stock, which seems very much the case as it can primarily be used for investment purposes rather than as currency due to the high prices.

In the latter case, forecasting price actions of anything traded at an exchange is a risky probabilities game – nobody is right all the time. Many investors have lost lots of money if not their life savings to such efforts. The two main approaches for predicting price movements in stock exchanges are called fundamental analysis and technical analysis. While technical analysis observes the direction of prices based on past market data, primarily historical prices and volumes found on price charts. Fundamental analysis, on the other hand, uses business‘s financial statements usually to analyse the assets, liabilities, and earnings. In case of Bitcoins, we have technical charts which will help us predict their future behaviour. These charts help us predict lower and upper thresholds which if breached could see the price move in either direction.

A typical stock follows the behaviour of that of a product life cycle model. In which there is introduction stage followed by growth, maturity and eventually decline. Meanwhile, all the stages are governed by the fundamental and technical analysis. What is noticeable about a stock is that it is mostly a highly volatile investment with prices going up and down on the daily basis. The other thing to be noticed is that there will be a maturity of price and eventual decline in stock price. It may be temporary, but it will appear many times during the lifetime of a stock. Most of the stocks also witness sharp movements while going up or down. Bitcoin will probably follow the same stages while going forward. Creating an upside, bottom price limit and moving within the range for a while. If it breaks the upper limit we may witness further uptrend in its price. Whereas, breaching the lower price limit could lead to a further drop in its price. When a stock breaks an upper price limit investors being optimistic invest more in anticipation of further rise in price. The same case is valid in vice versa situation.

Kashmiris are no strangers to stock price fluctuations especially during the period from 2005 to 2010, which witnessed a number of people trying their luck in the stock market. Their behaviour was typical of an amateur investor buying the stock when the price has matured, followed by further purchases of the same stock to average their price when there is a drop in price. This was the scene in case of equity stocks. People even invested in futures and options markets in order to make a quick profit. But, what they failed to realize is that knowledge and expertise play a key role in stock investing. As some elite investor has rightly said: “One needs to have an experience of 30 years before investing in futures”. Same seems to be the case with Bitcoins as the news came a month back that “Uber drivers” have started taking interest in them. Maybe its time for elite investors to get out and sell their Bitcoin units to amateur or newbie investors. A typical Stock market scenario.

Bitcoin has its share of both enthusiasts and detractors. Critics from various fields have come into the limelight recently, declaring Bitcoin to be too volatile for investments and recommending people to stay away from them. As per them, Bitcoin is growing as a result of basic economics. The supply is limited to 21 million units and this necessarily makes Bitcoin a scarce commodity. Mining them is a hectic process with very less productivity. When things are scarce and people want those things, their value will ultimately rise. Supply-demand mismatch function at work. While as, its supporters argue that, investors who have held shares of Infosys, TCS, Tech Mahindra or Wipro and many high flying tech names over the last few years, too have endured single day drops greater than the Bitcoin has ever witnessed. But, if Bitcoin is a new class of asset, as most of the supporters argue then to gain mainstream adoption it doesn’t need to behave like other investment avenues we already know. They think it just needs to mature and the market dynamics signals it’s doing just that. What the supporters fail to realize is that stock movements depict the underlying investor behaviour who hold or trade them. So, keeping that in mind we will witness Bitcoin follow the same behaviour as that of their investors.

It will be extremely interesting to see how the price of Bitcoins behaves in future. We have made a case for both upward and downward movement in their price. Some crucial times are coming ahead, but at the moment there is no doubt that Bitcoin has simply been the best investment ever in terms of returns over the last 100 years or more. This will be remembered in history and will feature in textbooks in years to come.

While talking about the behaviour of Bitcoins. It is interesting to notice that some countries like Japan are making efforts to add them to the mainstream financial system. Whereas, there are countries like South Korea which is, again and again, cautioning against investing in them and has closed various exchanges working from the country. This makes predicting the behaviour of the coin’s more difficult. Fundamentally, this makes them weak and will have an adverse effect on the movement. We have already witnessed in a downward shift in their price as some countries are resorting to closing down their exchanges.

Whatever happens to Bitcoins in future, the thing that one is confident of is that the underlying technology behind them i.e., Blockchain is going to be the future. Also known as Digitalized Ledger Technology, it will revolutionise how transactions are conducted and make them quicker, efficient and cost-effective as it removes the need for intermediaries. This will happen over a number of industries as it has been found very much useful in optimising supply chains. When one will look back at the evolution and history of Blockchain and their origins it will point to Bitcoin.

Mohammad Idrees Ul Islam
Scholar Department of Management Studies, University Of Kashmir.