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Bitcoin's Value Reaches Crucial Levels


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When I wrote a couple of weeks ago that Bitcoin’s value in U.S. dollars (BTC/USD) could fall into a new, lower range before stabilizing in the early part of this year, I kind of assumed it would take more than a couple of trading days. Heavy selling at the start of the year, however, pushed BTC/USD below $300 to new 12 month lows.

The selling was most likely prompted, at least in part, by problems at one of the largest exchanges, Bitstamp. There is much speculation as to the cause and possible effects of that outage, but until more is known I will reserve comment and focus on the implications and possible effects of the price movements. On that basis, regardless of the situation at Bitstamp, the next week or two will prove critical for BTC.

 

Chart from bitcoincharts.comChart from bitcoincharts.com

 

Logically, of course, there is nothing special about BTC/USD under $300. In fact, if you look at pricing before the spike of 2013, it could be argued that there is still further to fall before stability is achieved. That run up to $1100 launched from a base of around $125. If we assume that that level represented fair value at that time then we can, in a very rough way estimate fair value now.

Since then the Fed, through QE has added about $1 trillion to the economy which, again very roughly, amounts to a 10 percent increase in money supply as measured by M0. In effect they have devalued the dollar by 10 percent. Yes, I know the dollar has trended higher in that time against other currencies, but that is more to do with Euro and Yen weakness than anything. The total Bitcoin in circulation has also increased in that time, but so has acceptance and utility of the virtual currency. If we assume that those two things cancel each other out, then BTC/USD somewhere around $140 would represent a return to pre-bubble levels.

Obviously, that estimate involves a whole bunch of assumptions and is questionable at best, but the point is that the drop doesn’t necessarily represent a crisis in Bitcoin; it may just be part of the return to fair value. With the level of acceptance increasing at such a fast rate, however, if Bitcoin is to retain credibility in the short term some degree of stability is needed at around these levels. Yesterday’s bounce back from the lows gives hope, but caution is still advisable.

If we turn tail again and break back through $250, then it would be logical to conclude that there is no added value and a return to below $200 would look extremely likely. If, on the other hand, that level holds then it will provide a point of support from which a decent rally can be expected. From a swing trader’s perspective going long here with a view to cutting and reversing the position on a drop below $250 looks to be the best strategy.

Of course, to those who see Bitcoin as a game changer in international finance, or as a truly long term store of wealth, none of this matters. They will trust the market to do its thing. As the falling price puts increasing pressure on miners and causes the rate of supply to slow, supply and demand dictates that the price will recover. That assumes, however that demand remains constant or increases and it is that assumption that leads me to describe the current level of BTC/USD as “crucial.”

If the next few weeks see a collapse back down to around $150 it won’t signal the end of Bitcoin as some opponents would have you believe. As stated above, that could be seen as just a return to fair value and therefore a healthy thing. What it would do, however, is reduce confidence to a level that would take years to recover from, regardless of the logical case for virtual currency. For that reason price action over the next few weeks should be watched closely, even by those with no intention of selling.

  • This slideshow takes a look at Bitcoin and its short history, as well as 

a few other virtual currencies that have left their marks in the world. Shutterstock photo.
  • Bitcoin was <a href='http://www.newyorker.com/magazine/2011/10/10/the-crypto-

currency' target='_blank'>invented in 2008 by Satoshi Nakamoto</a>. It was released as open-source software in 2009. 

Nakamoto, who claimed to be a  36-year old Japanese man, said he created bitcoin in response to the financial crisis at the 

time. Shutterstock photo.
  • Bitcoin is a virtual currency (technically a cryptocurrency), and there are 

21 million bitcoins which can be mined. As of August 2015, about 14,500,000 bitcoins have been mined. iStock photo.
  • A cryptocurrency is <a href='http://www.coindesk.com/bitcoin-digital-

currency-virtual-one/' target='_blank'>based on the principles of cryptography</a> - namely, based on a peer-to-peer 

network. Most currency in the world can be held digitally (like gift cards); currency that's virtual, like bitcoin, exist only 

on the internet. Some financial analysts consider bitcoin a commodity. Shutterstock photo.
  •  At first, a single bitcoin was worth less than a penny; as of August 2015, a single 

bitcoin is worth about 215 U.S. dollars. Shutterstock photo.
  • He announced in April 2011 that he was moving on from bitcoin, leaving that 

life behind. A highly controversial 2014 Newsweek article claimed to have identified Nakamoto, but the bitcoin creator came 

out of hibernation to <a href='http://www.cnbc.com/2014/03/07/real-bitcoin-creator-i-am-not-dorian-nakamoto.html' 

target='_blank'>say that he was not the person identified</a> in the Newsweek article. Newsweek Magazine cover.
  • The blockchain is the heart of bitcoin. It's a public ledger that records all bitcoin 

transactions, open to all users. And it's incredibly secure, making tampering very difficult. The blockchain has drawn the 

interest of many financial companies. Even <a href='http://www.bloomberg.com/news/articles/2015-07-23/nasdaq-expects-to-

be-first-exchange-to-use-bitcoin-technology' target='_blank'>Nasdaq is planning to incorporate blockchain 

technology</a>. Shutterstock photo.
  • Bitcoin has faced its share of controversies. Due to anonymity, people can use bitcoin to 

fund illicit activities (see: <a href='http://www.bloomberg.com/news/articles/2013-10-03/fbi-snags-silk-road-boss-with-

own-methods' target='_blank'>Silk Road</a>). Another major dustup occured during the <a 

href='https://www.nasdaq.com/article/a-480-million-mystery-the-saga-of-mt-gox-cm507054' target='_blank'>$480 million 

collapse of Mt. Gox</a>. Shutterstock photo.
  • However, bitcoin is becoming widely accepted, with retailers like Microsoft and Baidu 

accepting bitcoins. It is by far the most well-known digital currency, but not the only one. Shutterstock photo.
  • It was launched in 1996, and was the <a href='http://www.wired.com/2009/06/e-gold/' 

target='_blank'>first digitial currency to get widepsread usage</a>. It let people open accounts based on the value 

of gold, but was ultimately shut down by the U.S. Federal government after its founder pleaded guilty to money laundering-

related crimes, and running an unlicensed money transmitting service. Shutterstock photo.
  • In 2007, <a href='http://www.bankingtech.com/196932/virtual-currency-ven-takes-on-bitcoin/' 

target='_blank'>Ven was launched</a>. It is now seen as an alternative to bitcoin, based on currencies, commodities, 

and carbon futures, making it an environmentally conscious currency. It is listed on the London FX trading venue LMAX 

Exchange. Shutterstock photo.
  • Originally conceived as a joke, it became popular very quickly, reaching a capitalization of 

$60 million by January 2014. (The meme was based on an image of a Shiba Inu dog. <a 

href='http://knowyourmeme.com/memes/doge' target='_blank'>Read more about that here</a>) One year later, that number 

has fallen to $13.5 million. <a href='http://motherboard.vice.com/read/talladega-shibe-josh-wises-highlights-in-the-

dogecar' target='_blank'>Its most notable moment came when the community sponsored a NASCAR racer</a>, which led to 

the Dogecoin car being featured at several high-profile races.
  • This digital currency, along with DopeCoin hopes to make it <a 

href='http://smallbusiness.foxbusiness.com/technology-web/2014/03/20/dopecoin-potcoin-want-to-solve-marijuanas-banking-

problems/' target='_blank'>easier for marijuana businesses to process money</a>. PotCoin focuses on the legalized 

marijuana industry. Shutterstock photo.
  • As mentioned earlier, bitcoin's blockchain technology has drawn a lot of interest, even to 

the point where some are saying that the <a href='http://www.forbes.com/sites/gregoryferenstein/2015/07/29/former-obama-

tech-advisor-explains-how-bitcoin-could-transform-government-in-5-quotes/' target='_blank'>blockchain is actually more 

important than bitcoin itself</a>. Shutterstock photo.
  • But digital currency has the potential to <a 

href='https://www.nasdaq.com/article/bitcoin-and-remittances-can-it-work-cm504136' target='_blank'>become much more 

democratic</a>, with the rise of crowdfunding and microlending taking the place of more traditional bank loans. New 

payment systems like Paypal and Apple Pay are making it easier for people to spend money online. And currencies like bitcoin 

could be used by those who live in emerging markets to save money while making exchanges, or even store value in a more stable 

currency rather than inflationary fiat currency. Shutterstock photo.
  • Regulation of bitcoin, however, remains a contentious issue. Bitcoin 

adherents don't believe in regulation - after all, that was why bitcoin was made in the first place, they argue. But others 

see that bitcoin's growth and ultimate mainstream adoption requires some regulation. <a 

href='http://fortune.com/2015/04/23/theres-big-pressure-on-new-yorks-bitcoin-regulation-plan/' target='_blank'>New York was 

the first state to roll out a policy</a>, but more could be coming soon. Shutterstock photo

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.





This article appears in: Investing , Forex and Currencies , Investing Ideas , US Markets



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