Panic. This one word sticks in the back of everybody's mind when
assessing what's been going on in the Bitcoin market for the past
couple of days. It might be hard to get one's head around the fact
that the currency was at $900 on February 5, only to almost reach
$300 today. The sell-off continues, today coinciding with news of
another hacker attack.
TechCrunch reported yesterday
that around 4,500 Bitcoins, worth upwards of $2,700,000 had been
stolen from Silk Road 2, the successor of the black marketplace
that had been shut down last year. It is perhaps no wonder that
engaging in possibly illegal activities may result in problems, in
this case those of a financial nature. Worrying is the fact that
the hackers exploited the same bug which had earlier caused severe
problems for Mt. Gox, Bitstamp, and BTC-e.
This bug, called "transaction malleability," has been known for
some time, but only now did it actually become a burning issue for
the Bitcoin community. The accounts of Silk Road 2 were completely
wiped out. Around 95% of the coins are supposed to have been stolen
by one person or entity.
Knowing that, we might be able to understand why Mt. Gox and
Bitstamp put all Bitcoin withdrawals on hold. Perhaps, thanks to
that, there has been no theft of funds on those exchanges. On the
other hand, the bug seems to be serious. Serious enough to keep
Bitcoin developers working on a resolution almost 24/7.
The news of late hasn't been particularly good for Bitcoin
enthusiasts. Serious bugs have been detected, and the price has
fallen dramatically. Right now, there's no telling how low the
currency might plunge. It will depend on how soon amendments are
made in implementation and how seriously devastating for the
Bitcoin community this turn of events turns out to be.
At this time, our best bet is that Bitcoin will recover following
favorable news -- for instance, announcements that transaction
malleability has been fixed. The time at which a move up will take
place is hard to pinpoint. We have to stay focused and look for any
new news from Bitcoin developers and exchanges.
Now, let's take a look how the situation looks on the chart.
Yesterday, Bitcoin lost 15.0% compared with the previous day's
close. The volume was up, and we saw a continuation of the move
down. The currency was dancing around the $540 level (solid red
line on the chart).
Today, we're seeing more madness in the market. The currency is
already 23.5% down (this was written at around 9:00 a.m. EST) on
significantly higher volume than yesterday. Overall, 48,718.9
Bitcoins have been traded so far. Right now, Bitcoin is at $345.15,
below the December 18 low (the already mentioned solid red line on
Such depreciation and a move below on significant volume paint a
decidedly bearish short-term picture. Yet, Mt. Gox has become
increasingly decoupled from other exchanges. Bitcoin trades at
above $600 on both Bitstamp and BTC-e, which have had similar
problems to Mt. Gox. Bitstamp has hinted that it will
later in the day, which might partially explain why this is the
case, but BTC-e seems to be still having problems, as evidenced on
its Twitter account by comments suggesting that the exchange is
interchangeably up and down
We're waiting for news from Mt. Gox; a solution to the transaction
malleability problem might contribute to a meaningful reversal, but
my firm wouldn't bet on it just now. Also, betting on further
declines seems particularly risky at this time.
Summing up, in my firm's opinion, no short-term positions should be
kept in the Bitcoin market just now.
For the full version of this essay and more, visit
Mike is a quantitative analyst focused on economic reality, not
theoretical models. His investment thinking is grounded in
empirical evidence and common sense. A holder of two master's
degrees in quantitative methods and finance, he researches economic
uncertainty, portfolio management, and investor behavior. At
he develops innovative
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