In any market, price action dominated by traders rather than fundamental factors is a double-edged sword. Bitcoin is no exception to that, but for those whose attachment to virtual currency is more ideological and emotional than practical and financial, it can be frustrating. They see their baby becoming the plaything of traders and despair. That despair, however, could be misplaced based on action in BTC/USD over the last month. There is ample evidence that speculative traders are pushing Bitcoin around, but the longer that continues, the closer we are to achieving something that Bitcoin sorely needs if it is to fulfill its potential: relative stability.
That may seem contradictory to some; I mean, aren't traders the ones causing the extreme volatility? Until recently I agreed and saw the danger in that, but my view has changed based on events in the last few weeks. How can their attentions have the opposite effect and minimize the 20-50 percent moves that have become commonplace? To answer these questions we have to understand the nature of the evidence that traders are currently in control, and why the nature of that control has changed over the last month.
When markets react to fundamentals, they do so freely, with long trends that rarely change until the fundamental picture changes. In conventional forex, for example, if Japan were to unilaterally raise interest rates significantly tomorrow, the Yen would be relatively more attractive to investors. That relative strength would continue until something changed, so the move down in USD/JPY that resulted would be sharp initially and then gradually slow down. Until the BOJ cut rates again or other countries raised them, however, it wouldn't be expected to stop or change direction.
Similarly, when traders are in control initially, all moves are exaggerated. People aren't buying or selling the commodity or currency because they believe in the long term future or failure of it, nor is their motivation any view on the relative worth of that particular instrument. They just perceive weakness in one side or the other of the market and exploit it. At this stage, the big boys rule and can use their muscle to push everybody else around; once smaller traders start to act as a group, however, that situation changes.
A small trader’s motivation usually comes more from reading a chart and identifying the likelihood of a move and the potential profit/loss ratio of the trade. Those decisions are made based on previous price performance so, inevitably, recognizable points of support and resistance form over time.
Really, when you stop and think, there is very little logic to that. The fact that BTC/USD's post-$1100 bubble low is $170 could be due to any number of factors. It could be that at that time it became clear that major Wall Street investors were committed to a "fully regulated" Bitcoin exchange in partnership with Coinbase changed many people’s fundamental view of the long term future of Bitcoin, and If that were the case there is no reason that $170 would offer resistance in the future. Similarly the fact that the bubble burst at $1100 doesn’t mean that there is anything magical about that price either. Despite that, if either of those levels is reached again, we know that it is most likely that $170 would provide support and $1100 would see some serious resistance.
Trading based on past price action is a kind of self-fulfilling prophecy. The fact that people believes other will act prompts them to act and once they do the level holds. Take a look at this chart, for example, from cryptocoinsnews.com.
It is clear that over the last month or so the $200 level has held every time we have been down there. Now, in a shorter term trend it looks like $230 is holding following a run up above $250 and a retracement. As this analysis, again from cryptocoin news, points out, even levels based on metrics more esoteric than simple support and resistance, such as Fibonacci levels and Elliot Wave theory, are becoming significant.
That increasing use of technical points counteracts the danger that I wrote about last month. At that time it seemed that aggressive selling was all in vogue, and there was nothing to stop or counteract that. The increased resistance from technical levels in the last few weeks, however, gives reason for hope. What naturally happens when technicals dominate is that trading ranges narrow over time. Not wanting to miss out, small traders place orders in front of predicted levels and if enough of them do so, strong support is established above the previous level. The same happens with resistance and eventually the overall range narrows.
The evidence suggests that we are at that stage and, assuming no huge news of a fundamental nature, we are entering a period of consolidation. The BTC community should certainly hope so. The longer the currency remains stable and fairly predictable the more likely it becomes that at least one of the major companies now accepting BTC will begin to hold at least some money in the currency rather than instantly exchange for conventional money.
Once that happens there is a chance for BTC to exist as a separate ecosystem independent from fiat currencies. If that state is achieved, then many of the dreams of the Bitcoin realists are within reach. We are not there yet as all of the “ifs” and “whens” should indicate, but the increased evidence of technical trading over the last month suggests that we are closer than we were.