Nov 1, 2014 --- Bitcoin
Many financial market pundits, especially those of the conservative variety, have been licking their chops as they bring their special brand of “I told you so”s to bear upon the last 10 months of decline in Bitcoin’s trading value, especially after this past weekend.
However, their cause for alarm is premature at best, and misguided at worst.
Has the price dropped from its record highs over the $1000 high water mark of late 2013? Yes, that’s not in question. As of the writing of this article, Bitcoin even dipped below the $300 mark, after hovering most of 2014 within the $400 – 600 range (the high was 1163 $ in Dec ‘13).
Traditionally, the best sign of being in a bear market is lower highs and lower lows, even with the release of good news. Despite the fact that more merchants and technology companies (such as PayPal and Square Payments) are continuing to publicly endorse and accept Bitcoin, there are still some factors that are missing in order to really give the virtual currency the strong foundation that it needs to become bullish again.
What this means, technically speaking, when a market cannot go up on good news, is that there is simply a glut of supply in the market, that demand is not currently keeping pace with. Now, that can change dramatically, as we have seen in the past, especially as more people place their confidence in the long term viability of the digital currency, as not just a store of value, but as a means of frictionless transactions for daily living.
Shortsighted Gains
There truly is no reason to become overly bearish at this point, especially given the news of larger firms investing in Bitcoin infrastructure. While many merchants and consumers might not want to store their wealth in Bitcoin at the moment, that is not indicative of future trends.
Simply put, while many Bitcoin transactions are taking place on a daily basis, the volatility of the trading price causes many people to sell their Bitcoins as fast as possible, in order to lock in their value in a more known fiat currency.
This is simply short-term thinking in the daily practice of most merchants and consumers, who are missing the long-term upside of the digital currency, and the impact it will continue to have on global commerce.
As good news for Bitcoin continues to pile on, especially if we see future weakening in major fiat currencies, investors and consumers alike will again flock to Bitcoin, in order to not just maintain, but also grow their wealth.
From where we sit, it’s not question of if the trading price of Bitcoin will rise again, but simply a matter of when, and, how much higher we anticipate it will go during the next bullish phase.
So, when will this happen?
A great litmus test for knowing when a currency or any asset is entering a bullish phase is when you see the trading price continue to rise, even on bad news, for example the Silk Road scandal.
A Baked-In Hard LimitAnother major plus in Bitcoin’s favor is the fact that a limited currency supply is baked in to its technological underpinnings. In other words, the 21 million supply constraint is written into the core Bitcoin code. This protects it from profligate inflation, and will eventually be deflationary!
An Economic “Hot Potato”Bitcoin is simply a “hot potato” asset class at this point. More and more people are readily accepting and spending it, due to its favorable characteristics such as speed and zero fees. However, as soon as someone receives it, they immediately want to lock in its value, typically in U.S. dollar denominations. This simply means that the market is not attracting enough buyers to absorb the excess bitcoins on the open market – for now.
As of late, another big reason for the decline in the overall value of Bitcoin in mid to late September, was the fear that once the Alibaba IPO would go public, large quantities of Chinese investors would then begin to dump their Bitcoin holdings. To a certain extent, this is what happened. However, it was only days later the market rebounded with the announcement of Bitcoin integration by online merchants PayPal and Square.
Then the most recent news, the appearance of a “Bearwhale” who, upon selling his 30,000 in Bitcoin, helped drive the price down by a full 10% in early October. Over a 6-12 hour period, the market appears to have bottomed, and it was only 24 hours later that the prices were starting to rise once again.
Though prices have fluctuated over the past few years, remember Bitcoin, and all other altcoins are still a very young form of currency that are still fighting to be viable.
What does all this mean?
There are simply some short-term external events and forces that have suppressed the trading price of the crypto currency, not any fundamental problems with the Bitcoin currency or its trading platforms.
Since the Alibaba IPO passed, as merchants continue to adopt the Bitcoin currency, as we inch closer to the hard cap on number of Bitcoins in circulation, and as we have hit what seems to be a hard floor the trading price should have no choice but to rise, yet again.