In today’s Exponential Investor

  • How to measure the bitcoin hype at a glance
  • What is not really driving the latest surge in the price
  • The latest technological development explained

If there is a consistent theme that runs through most editions of Exponential Investor it is this: what really matters to an investor generally cannot be found in the headlines of the mainstream or the financial media.

Right now, the latest surge in the price of bitcoin – which is approaching a new all-time high – is a case in point.

Ignore the headlines

Mainstream commentators are focusing on the launch of a bitcoin exchange-traded fund (ETF) in the United States.

However, it’s not really an ETF that holds bitcoin. In fact, it’s more of an artificial bet on the bitcoin price: the ETF uses cash and derivatives to track the price without actually owning the underlying asset.

Some investors will be attracted to the new ETF because it is an ETF. It is listed and regulated and should closely track the price of bitcoin.

The custody and administration and accounting should be as simple as it is for any other listed investment in their portfolios.

Nevertheless, owning shares in the ETF is not the same as actually owning bitcoin directly.

The arrival of the new ETF is generally regarded as good news.

It is yet another sign that bitcoin is becoming a mainstream investment…

…and that, in turn, means that adoption of bitcoin by people and institutions who do not currently hold it should rise.

However, the optimists do not understand two things.

Bull markets are sustained by fundamentals, and not by hype

The first is that publicity about new holders and users of bitcoin does not, of itself, guarantee a bull market for bitcoin.

Back in 2017, the launch of bitcoin futures coincided with the peak of the market and the onset of the crypto-winter.

More recently, the initial public offering (IPO) by leading crypto-exchange Coinbase coincided almost perfectly with bitcoin’s reaching a new peak price earlier this year.

For a while, publicity about Elon Musk’s activities in the bitcoin market also boosted the price.

Source: Koyfin

You can see from the chart how the price of bitcoin ran ahead of the trend (shown as the 200-day moving average, which is depicted with a red line) in the middle of this year.

In July and September, by contrast, investors’ mood towards bitcoin was far less euphoric. The price of bitcoin fell below the 200-day moving average.

More recently, the price of bitcoin has surged again.

However, here at Southbank Investment Research, we believe that there is a fundamental change which justifies the latest strength in bitcoin.

And, that change is the second thing that the optimists – whose views feature prominently in the mainstream and financial media – just don’t understand…

…or understand, yet.

Getting to the root of the issue

Money, as my colleague Sam Volkering likes to say, is improving.

Even if it is not yet widely used as a medium of exchange, bitcoin has many of the characteristics of money.

So, what is really happening?

In two words, a technological development.

And unlike the big mainstream news stories about IPOs and ETFs, technological developments of the bitcoin code have a powerful history of increasing prices for bitcoin and across the crypto sector.

I’m not talking about the halvenings.

As you may be aware, these are events which happen to bitcoin about every four years, when the new supply of coins drops by half.

Those have invariably been good news for the price of bitcoin.

The last one happened in May 2020, and just look at what has happened to the price of the crypto-currency since then…

But no, this latest technological development is something else.

This is a change to the code which underpins the bitcoin network, which has been universally agreed on by the users of the network.

This is a classic example of the democratic nature of bitcoin. The people who use the network get to decide what happens to it – not some government or financial entity.

The change in the code will make bitcoin more secure and faster, and opens up a whole world of possibilities.

These possibilities include a new capability for bitcoin to participate in the emerging world of  decentralised finance or DeFi.

It’s all happening very soon.

All the best,

Kit Winder
Editor, Exponential Investor