It’s starting to look like 2017 all over again.
After stagnating for the better part of three months, Bitcoin went on a sudden rally starting on Tuesday, rising as much as 20% by the end of Wednesday. As of this writing, Bitcoin was trading for $6300 CAD, with $100 price swings happening quite literally by the second. It’s clear that Bitcoin has ended its brief flat period and returned to the volatility it was previously known for. The question is, does this make BTC a buy?
First, we need to take a close look at what drives Bitcoin’s price swings in the first place.
What drives the price of Bitcoin? Bitcoin, like any other asset, rises in price when demand goes up compared to supply. As for what drives demand itself, that’s a little more complicated.
Despite its having been created as a digital currency, Bitcoin is not widely used for buying (legal) goods. Instead, it’s mainly used for two things: speculating (buying in hopes that somebody will pay more for it later), and purchasing goods on dark web markets.
In the past, I wrote that Bitcoin’s relatively flat price from December 2018 to March 2019 could be a reflection of speculative interest subsiding. The theory was that because most high-profile shorters had covered their positions and bullish sentiment was low, the small price swings seen at the time were likely a product of accumulation by dark web market users.
That was then, this is now. With volatility coming back to the Bitcoin scene in a big way, it’s likely that market dynamics have fundamentally changed. And you can probably guess that this has something to do with speculators.
The #CryptoTwitter phenomenon #CryptoTwitter is both a hashtag and a term referring to a collection of cryptocurrency-related Twitter accounts. Encompassing everything from armchair commentators to people “pumping” their favourite coins, it plays a huge role in the cryptocurrency phenomenon online.
Why is #CryptoTwitter relevant?
Quite simply, it (and related communities on other social media platforms) plays a huge role in driving speculative interest in cryptocurrency. Not only can influencers pique peoples’ interest cryptocurrencies, but they can also influence prices to an extent by this means.
This naturally lends itself to speculative ‘boom and bust’ cycles. It’s no surprise that the 2017 crypto bull run was accompanied by a flurry of social media activity; to a very large extent, it’s this kind of social media hype that drives Bitcoin and other cryptos in the first place. Assuming this type of hype is starting up again, then it’s the most likely culprit behind Bitcoin’s current rise.
Foolish takeaway The bottom line about Bitcoin is that unless you have some deep technical knowledge of blockchain technology or crypto market dynamics, you probably shouldn’t be buying it. First, profiting off cryptocurrency is largely a matter of timing, a successful timing often requires exclusive information.
Second, converting Bitcoin to cash can prove difficult, as many banks like Toronto-Dominion Bank (TSX:TD)(NYSE:TD) have been clamping down on it. So while it’s pretty easy to sell crypto on an exchange, it’s not clear that the proceeds will ever make it to your bank account.
Although Bitcoin isn’t going away anytime soon, short-term rallies like this one are no reason to buy it.
Fool contributor AndrewButton has no position in any of the stocks mentioned. Tom Gardner owns shares of Twitter. The Motley Fool owns shares of Twitter.
The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool Canada’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Motley Fool Canada 2019