Market Commentary – April 20th 2015
So in the past month alone, the value of one bitcoin has fallen from 196 UK pounds sterling to 149 UK pounds sterling – a drop of 24%. These sorts of moves defy traditional financial analysis. Typically, a currency trader would be called upon to comment if a currency increases or decreases in value by say 0.50% over the course of a month. A move of 24% is so far removed from the scope of traditional finance, to look at graphs of volume and activity in an attempt to determine the traditional market drivers can only be a mistake. Instead, let’s take a step back and think of the big picture.
Bitcoin tends to be a long-only currency. That is, it is difficult (but not impossible) to short a Bitcoin position if you don’t already own the Bitcoin. So a criticism often levelled at Bitcoin is that adopters of the cryptocurrency will buy it, save it, and maybe eventually sell it once it has reached a target level of profit vis-à-vis a fiat currency.
A traditional currency, on the other hand, will have both savers and borrowers, hopefully in some semblance of rough equilibrium, which is what lends stability to the currency. But that is not the case with Bitcoin.
With the 14+ million bitcoins in circulation currently, they will have found their way into the wallets of individuals doing precisely what is described above – buying them, saving them, and waiting for their value to rise. But if the value doesn’t rise, they have to wait longer. And the longer they wait, the less patience they have. Finally, if they are fed up of waiting, they sell their bitcoin. And this lowers the price ever so slightly, as it increases market supply of the currency. And that slight movement could well trigger the patience limit of yet another Bitcoin saver, leading to a downward spiral and the vicious market volatility that Bitcoin sees, outstripping the moves observed in all major fiat currencies.
So can we predict how Bitcoin is going to behave? Well, if it were up to me, I would take an even-money bet that due to the self-regressing trending nature described above, Bitcoin is likely to move on any given period in the same direction as it did the previous period. That won’t always hold true, of course, but for the moment, the current downward trend would seem to be far from over…