Cryptocurrency unlikely to be a stable currency

The "Musk premium" has evaporated from Bitcoin markets, leading to the umpteenth wake-up call for anyone not on magic mushrooms: This is not the future of money. With price swings like a 26 per cent fall in one month, the cryptocurrency is unlikely to be adopted as a widespread method of exchange any time soon. It's about as useful as a chocolate teapot at the moment - you can't even use bitcoin to buy a Tesla.

For those willing to look past the cultish side of cryptocurrency, it's obvious people are making money on the way down as well as the way up. While this is hardly a market immune to regulatory crackdowns or scams, for now the price moves look within the bounds of what technical analysis and commodities-style trading models would suggest - not just shifts triggered by those seeking to emulate crypto billionaire Christian Angermayer, who says he needed to ingest hallucinogenic fungi to "get" it.

Earlier this week, with Bitcoin trading at about $44,000, our Bloomberg News colleague Joanna Ossinger reported that traders were anticipating a further decline based on chart patterns. Specifically, they saw a risk of a drop through the 200-day moving average that threatened a move below $40,000. And so it came to pass:

Currency markets have always been the favorite playground for technical analysts. Bitcoin seems eminently susceptible to shifting higher and lower based on what chart watchers discern the next trading band should be. On that basis, the digital coin could be headed for a move below $35,000 if it can't hold its current value of about $40,000 - a key 50 per cent retracement level from its mid-April high, according to Fibonacci analysis.

Drawing retracement lines or moving averages obviously doesn't require a galaxy brain and it is not in itself a trading strategy. But maybe that's the point. If the finest minds of finance have worked out how to trade everything from French electricity prices to rare earth metals, they're clearly capable of riding crypto levels of volatility, which is what's attracted veteran hedge fund folk like Stan Druckenmiller and encouraged Goldman Sachs Group Inc to have another go at building a cryptocurrency desk.

In cryptoland, there are more adventurous price inefficiencies to exploit, different jurisdictions to arbitrage and - if Elon Musk's tweets are anything to go by - bots to monitor social media to stay milliseconds ahead on any change in sentiment. As Wall Street trader Trey Griggs told Bloomberg News's Justina Lee, "All the fun that used to be had 30 years ago in the commodity markets … is now in crypto."

The obvious direct route to profit from a drop is to short Bitcoin itself, which has always felt like picking up pennies in front of a steamroller. But new futures contracts and highly leveraged products offered by exchanges have attracted more demand. The proliferation of stocks that serve as Bitcoin proxies, such as Coinbase Global Inc, also opens the way to easier forms of short selling. Short-interest ratios at Cathie Wood's Ark funds and MicroStrategy Inc, the enterprise software company that's made big bullish Bitcoin bets, have risen year-to-date.

The lingering question for Bitcoin "hodlers" is what its "true" price looks like, and whether its volatility can be surfed successfully over the longer term by even the most sophisticated investors. This is a market whose boom cycles tend to unravel dramatically as the crowds head for the exit. If the past is any guide, extreme events can break even the best model, leaving values heading into an abyss.

If that happens, the fun will run out, and it really will be an asset reserved for the brave - or the mushroom gourmets.(Bloomberg)