Why Volatile Bitcoin's Future Is Linked To The Interest Rate

If you own bitcoin, the past 10 days will have been brutal.

- Hamish Mcrae

"On 9 June, it was still trading above $30,000. This weekend it was above $20,000 in the early hours of Saturday morning London time, but plunged to below $18,000 for a few minutes on Saturday evening. Since then it seems to have made a partial recovery.

So what have we learnt? When you get these extreme movements in any asset, the best thing to do is to think dispassionately about where there has been new information, or at least information that helps clarify earlier judgements. I suggest that we can identify five main lessons from this bumpy period, and one area of total uncertainty that will persist for a couple of years at least.

Lesson one stems from the extreme volatility of the past few days. It is that the market for bitcoin is very narrow, given its still-massive market capitalisation. At around $19,500, the market capitalisation of bitcoin is $370bn. By comparison, that makes it quite a lot more than, for example, the oil giant Shell, worth around $200bn.

With an asset of that size, you would expect there to be a lot of short-term traders, seeking to buy on the dips and sell on the rises. Their actions help to smooth out the market price on a minute-by-minute basis, so that you only get really big movements in prices when new information comes along.