I believe I read somewhere that some of the big holders and speculators in Bitcoin are in China, as they want to get cash out of the country to avoid the controls in place. Have you heard the same? If so, the next big win could be to figure where they will invest once they sell bitcoin. Any ideas? 

Also, I am watching CME Group closely, and may buy. Since they trade futures, and make profits based on volume of transactions, they will do well both as Bitcoin gains and crashes as trading volume will be high. I guess they will get into other cryptocurrencies too.

Interesting opportunities are opening up as one studies this space. For the more cautious investor like me, just like the California gold-rush, the winning strategy may be to invest in the picks and shovels (Nvidia and other semi-conductor manufacturers for chips, CME Group for futures etc).

Best wishes

Eoin Treacy's view

Thank you for this email which may be of interest to subscribers. Yes, Chinese retail investors are a major buyer of cryptocurrencies but the practise of using bitcoin to funnel money overseas has been clamped down on over the last six months, not least when bitcoin exchanges were raided back in September. In the meantime, Japan and South Korea have become significant sources of demand. For example, South Koreans are currently paying a 23% premium to buy bitcoin. 

You are assuming that people who are investing in bitcoin today are going to get out with all their profits intact. That may be true for some but the reality from past manias is that many people leave with nothing because they do not have an exit strategy.

It’s important, from the perspective of a medium-term investor, to divorce discussions of how high Bitcoin has risen from the wider discussion about the evolution of blockchain technology which will progress independently of the price mania. Finance and healthcare are the two big industries that have yet to be meaningfully disrupted. If I had to guess where the mob will look to support the introduction of blockchain it would be in both of those fields.

I agree CME Group should benefit from increasing volumes of cryptocurrency futures and is already contemplating introducing Ethereum and Litecoin futures. Right now, these products represent insignificant volumes relative to the firm’s overall trading but that could change.

The share broke out of a four-year base in 2013 and has been trending higher in a reasonably consistent manner since. It is currently somewhat overextended relative to the trend mean so some consolidation appears likely. However, a sustained move below $130 would be required to question medium-term scope for continued upside. 

Metropolitan Bank IPOed in November and offers Bitcoin debit cards. The share has rallied steadily over the last six weeks but posted a downside key day reversal today.

Overstock’s CEO, Patrick Byrne, has been a champion of cryptocurrencies for some time and the company has been accepting bitcoin as payment since 2014; holding about 10% of earnings in bitcoin until August when they announced they were going to hold 50% in the cryptocurrency. News right now is that they are investigating a sale of the ecommerce venture to fund development of a cryptocurrency exchange. 

The share broke out of a multi-year base in August and hit a near-term peak in late November. It bounced from the $40 area and will need to hold that level if potential for additional upside is to be given the benefit of the doubt.

When choosing tangential plays on the crypto-boom it is important to pay particular attention to the facts of the market. for example, NVidia has rallied impressively more for how its graphics chips are to be used in autonomous vehicles and computers than bitcoin mining. The idiosyncrasies of the market mean that ASIC machines, primarily manufactured in China, are used to mine bitcoin, and do not require graphics cards. Meanwhile graphics chips produced by Nvidia and Advanced Micro Devices are used to mine Ethereum and other similarly organised cryptocurrencies.    

Here is another email I received today: “Aren’t the American btc futures a bit of a damp squib?” I suspect he is not the only person disappointed with the lack of a surge higher following the introduction of futures. Bitcoin prices have gone nowhere for the last three days and since many investors would have bought on the hopes of instant gratification some must at least be questioning whether they made the correct decision to buy in advance of the release of futures. Following such an impressive acceleration the loss of momentum is potentially an ominous sign of the risk of mean reversion.

This article talking up the potential to harvest the heat from our bodies to mine cryptocurrencies is a testament to how extreme sentiment is becoming and is further evidence of the developing mania. /

This article from CNBC highlighting how people are taking out mortgages to buy bitcoin is another example of the developing mania. I have seen forecasts of $80,000 and $100,000 for next year and even $1,000,000 over the medium term. Doesn’t this strike anyone one else as fanciful extrapolation? The competition to come up with the most ambitious forecast is a symptom of mania. 

Thanks also to another subscriber for this initial report from the team at Incrementum AG which is aiming to launch its own cryptocurrency fund. For a firm established by avowed gold bugs, hard money advocates and Austrian economists this represents a significant evolution for their business strategy and the acceptance of the cryptocurrency bull market hypothesis after what is already a very large move. It’s also worth considering that the firm, founded in 2013, two years after gold’s peak, writes extremely detailed and thought-provoking research but is not known for market timing.

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