19 Dec 2017 | 10.21 am
Market Insights From IG
Bitcoin valuation is so irrational that accurate price prediction is impossible
19 Dec 2017 | 10.21 am
Market trading in 2018 will be dominated by the pound, bitcoin and the US dollar, writes Martin Essex (pictured), Analyst and Editor of IG’s free news and research site, DailyFX.com
The pound defied most analysts’ predictions by strengthening markedly against the dollar in 2017. It even gained ground on the euro, despite the at times shambolic UK government approach to the EU Brexit negotiations. In 2018, it’s hard to see that strength continuing. We are now moving into a process which is much more complex than a decision over how much money the UK owes to the EU.
The ability to strike a deal that is right for all 28 parties is going to be incredibly difficult, and that has to be done on a sector by sector basis. With an extended period of time until another positive announcement, there is a strong chance the markets will focus on the UK economy, which is likely to continue to slow.
Given the experience of 2017, it will pay to be cautious before assuming a weaker pound. However, the currency has little going for it at the moment, particularly as the Bank of England will be wary about increasing UK interest rates for fear of being accused of stifling what little economic growth there is already in the country.
Turning to the US dollar, the index that measures its value against a basket of other currencies fell steadily for most of 2017 before steadying in early September. Here, the Trump effect will continue to be an important driver. His many critics have been relieved that the checks and balances built into the US political system have succeeded in curbing many of his campaign promises, like building a wall along the US border with Mexico. However, dollar strength is unlikely while Trump remains so unpredictable, and with clouds hanging over both the dollar and the pound, the euro is well placed to benefit.
The benefits were arguably held back in the last few months of 2017 by the failure of German Chancellor Angela Merkel to form a government. Stability in Germany would be another positive for the euro.
Turning to bitcoin, there is a saying – attributed to the economist John Maynard Keynes – that the market can stay irrational longer than you can remain solvent. As the cryptocurrency soared in price in 2017, there was increasing talk of a bitcoin ‘bubble’ about to burst. However, there is also a famous ‘greater fool theory’ which argues that a price can be justified by a rational buyer on the basis that someone else is willing to pay an even higher price.
I have no idea where bitcoin will be trading by the time you read this, and for traders that is precisely the point: predicting the bitcoin price in 2018 is impossible when its valuation is so totally irrational.
Finally, a brief word on the price of crude oil. Not so long ago, the OPEC cartel of oil-exporting nations controlled it but now, thanks to US shale output, there is a supply glut. Due largely to further turmoil in the Middle East, the crude price climbed steadily from mid-June 2017, but with the US shale companies ready to make up for any supply shortages, the trend in 2018 could well be downwards.