Bitcoin, Ethereum Hit New All Time Highs Amid Buying Frenzy, Liquidity Squeeze

The price of Bitcoin accelerated its recent exponential trend higher, soaring to daily all-time highs over the past few days, rising above $1,300 on Friday, then pushing $1,400 on Monday, and even above $1,500 on the second-largest BTC exchange, and was last trading just above $1,460 on Coinbase amid a buying frenzy attributed to speculative investment across the cryptocurrency sector, coupled with liquidity problem at some exchanges which were having problems processing fiat-based transactions.

Assuming a price of $1,400 - which is a rough estimate as there has been a wide discrepancy across the exchanges over the past week - would make bitcoin one of the best performing currencies, or assets - depending on one's view - of the year. Bitcoinhas never traded above $1,300, $1,400, or $1,500 before Friday. On the Hong Kong-based exchange Bitfinex, the second-largest cryptocurrency exchange, the price rose as high as $1,548. On CoinDesk, the price crossed $1,400 on Monday, and traded as high as $1,422.

As the WSJ's Paul Vigna observes, "Bitcoin has been struggling with a seemingly intractable internecine debate over network scaling, while similar projects have been drawing talent and investment dollars. But the price in 2017 has been generally rising, and rising sharply, amid a confluence of factors. Not all of the factors, ultimately, may turn out to be positive."

For now however, holders of bitcoin, as well as various other cryptocurrencies have been rejoicing at the move higher, expressing little concern about the possible negative implications.

“The space is definitely seeing more traction,” Charles Hayter, CEO of research site CryptoCompare. He pointed out, however, that a “mixed bag of reasons” was behind the weekend surge. One reason is a surge of investing across cryptocurrencies. Another are withdrawal problems plaguing specific exchanges, with liquidity drying up and supply-and-demand factors forcing the price higher.

In addition to Bitcoin, ethereum, ripple, and other established cryptocurrencies have all soared in the past week amid a new trend, called the initial coin offering, or ICO,  that has been growing in the sector. In an ICO, a startup issues its own bitcoin-like asset, either as a straight-ahead investment or as a token for use with a service or product offering. There have been dozens of new coins minted and offered for sale, the WSJ notes.

Putting bitcoin's recent gains in the dust has been Ethereum, the leading bitcoin alternative, which traded above $80 on Monday, rising more than fourfold from under $20 as recently as the beginning of March.

Even an alternative version of Ethereum called Ethereum Classic has been rising. On March 1, it traded at $1.29. On Monday, it was trading at $6.59. Ethereum has a more direct connection to the ICO trend than bitcoin, since many of the firms issuing these new coins are building products and services on the Ethereum network.

In addition to ICO, another catalyst cited for the move higher is "plain old supply and demand." While unclear if the result of a regulatory crackdown seen recently in Chinese-based exchanges, Hong-Kong based Bitfinex and some other crypto exchanges in the industry "have been dealing with liquidity and withdrawal issues the past few weeks." Specifically, Bitfinex had trouble processing transactions after the Taiwanese banks that handle them started blocking requests. That’s part of a trend where some banks are pulling out of sectors they deem risky.

While we will have a more comprehensive writeup on the recent troubles at Bitfinex, a representative from the xchange confirmed to the WSJ that the inability of investors to withdraw bitcoin is affecting the price. Perversely, instead of forcing the price of bitcoin lower, the liquidity squeeze is forcing traders to offer higher bids to get their bitcoin out, which is subsequently forcing the price up.

“This is not healthy,” said Vinny Lingham, CEO of bitcoin-based startup Civic and a high-profile trader.

For now, however, just like in the stock market, traders - at least those who are long the various cryptocurrencies - are happy with the move higher. If and when structural problems emerge, and the price tumbles, it may be a different story, although that may not take place for a while, because as the Nikkei reports, more than 10 Japanese companies are launching exchanges for bitcoin and other virtual currencies, with an eye to tap growing demand after legal changes that make such trades cheaper and easier in the country.

As discussed previously, starting July, Japan's consumption tax will no longer apply to purchases of virtual currencies. Exchanges in Japan have also been required since April to obtain a special license, which has requirements for finances and asset management structures, from the Finance Ministry.

One example: SBI Holdings has set up SBI Virtual Currencies, an exchange between the yen and cryptocurrencies like bitcoin and that of the Ethereum platform. The GMO Internet group is also establishing its own company, with plans to increase the number of digital currencies it trades based on demand. Securities and foreign exchange trader Money Partners Group plan to enter the field as well.

Which means that just as the Chinese bubble frenzy in bitcoin is fading, it may be replaced with a new one, in which thousands of Mrs. Watanabe traders shift their attention away from the FX market and toward digital currencies. If the transition is seamless, there is no telling just how far this particular bubble can grow.