One can scarcely follow business news (or increasingly news in general) without seeing a discussion of Bitcoin. The popular cryptocurrency, which relies on blockchain technology to build and maintain its credibility, has experienced a meteoric rise. It has also gained a great deal of attention, especially after the price ran through the bitcoin $10,000 mark.
This increase has been so dramatic, analysts often refer to the bitcoin price as a “bubble” or compare it to “tulip mania” from the 1600s. Additionally, stocks that get into the bitcoin business such as Overstock.com Inc (NASDAQ:OSTK) or Square Inc (NYSE:SQ) have found their share bid up in value.
However, the Securities and Exchange Commission (SEC) has suspended trading on Crypto Co (OTCMKTS:CRCW) until Jan. 3. CRCW’s suspension could mark a turning point in the growth of the so-called bitcoin bubble.
The Crypto Company describes itself as one that “provides institutions and individuals direct exposure to the growth of global blockchain developments.” Bitcoin mania drove the value of CRCW up from a low of $3.30 in September to as high as $642 per share on Dec. 1. and to $575 on Dec. 19.
One stock suspension will not necessarily end the upward move in the bitcoin price. However, the suspension serves as a warning that regulators want to cool any blockchain-related euphoria. With the rise in bitcoin’s price, other cryptocurrencies such as LiteCoin or Ethereum have risen to prominence. Interest in blockchain companies and by the public at large has also risen with bitcoin’s price.
Although governments have begun cracking down, bitcoin’s price has yet to show signs of falling. Since blockchains act as global databases, bitcoin and competing currencies reside outside the realm of direct government control. Still, suspensions of blockchain-related equities act as an incentive not to invest in this sector.
Moreover, the advent of bitcoin price futures may indirectly exert a degree of government control. The Chicago Board of Options Exchange (CBOE) opened bitcoin futures trading on Dec. 10. The CME Group, the world’s largest derivatives exchange, launched bitcoin futures on Dec. 18. The existence of these funds could direct capital away from bitcoin itself into the futures market, where governments exert more influence.
Most important, the bitcoin price chart remains a story of steep rises and big crashes. After its introduction in 2011, the price rose from 30 cents per coin to above $30 in a few months, and then back down below $5 a few months later. In 2013, bitcoin also experienced two crashes.
The first move took bitcoin from the $15 to $266, only to have it fall below $50 three days later. The run-up in December of that year took bitcoin above $1,200. By February 2014, the value had briefly touched the $100 range. Though it recovered, it spent most of 2015 in the low $200s until the current move higher began late in the year.
The latest move higher has attracted a lot more publicity than previous bitcoin price increases. However, investors need to know that bitcoin has a history of large up and down moves. A move higher from the current level remains a possibility, but a move below $2,000 would not represent the coin’s first 90+% decline.
The CRCW suspension could dampen investor euphoria related to bitcoin. The 17,000% increase in only a three-month period inspired the SEC to institute a two-week suspension on trading that stock. This suspension could lead to other blockchain stocks suffering the same fate. This could also inspire securities regulators in the Europe and Asia to institute similar moves.
Moreover, the bitcoin price has seen large crashes before. Three previous crashes brought its value down by over 80% from its peak value. While nobody can predict how high bitcoin can move, the threat of suspension and the involvement of the futures market bode poorly for bitcoin’s future value.
Given the history of crashes and the dampening effect of SEC involvement, avoiding long positions in bitcoin appears to be the wiser course of action.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.