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Markets Weekly: Could Central Banks Spark a Bitcoin Rally?

(@joonian) | Published on November 24, 2014 at 11:05 GMT

Following mid-November's price spike, the bitcoin markets have resumed regular service. The price has dropped slightly, while trading volumes have reverted to more commonly observed levels.

The price started last week at $385, according to the CoinDesk BPI, and closed the week at $366 – a fall of 5%.

Trading volumes fell precipitously by 39% last week compared to a week earlier. The number of coins that changed hands across all exchanges tracked by Bitcoinity stood at 3.68 million – down from 5.99 million over the previous seven days.

Nov 24 - coindesk-bpi-chart
CoinDesk BPI 17th-23rd November

Last week's giddy heights

The declining price and decreased trading activity last week is in stark contrast to the previous week's bidding frenzy. The price then achieved a high of $458 on 13th November.

Market watchers salivated as they anticipated a price breakout. The Nasdaq's resident blogger Martin Tillier, who has plenty of experience in the forex markets, advocated a bullish interpretation of the upswing. He pointed out that the Dollar Index had achieved a one-month peak, thus was due to decline. This meant that bitcoin traded against the dollar would gain in value.

"That could well be the short squeeze to end them all," Tillier wrote in his column last week, predicting that a breakout would take the price back up to $450 and beyond.

It was not to be, however. Instead, the bitcoin price has reverted to trading in the $350-$370 band, putting paid to hopes that last week's rally was the start of a new bull market.

Tillier's analysis remains optimistic, even in this trading band. In the less optimistic scenario where the price doesn't rocket, he wrote:

"Breaking that [downward trend] depends on establishing a new pattern of higher lows and higher highs. If BTC/USD holds above the $350 point ... it clears the way for that pattern to take hold."

Could central banks boost the bitcoin price?

The bitcoin price may obtain succour from an unexpected source in coming days: China's central bank. Even more incredibly, the central banks of Japan and Korea are also helping to pile upward pressure on the bitcoin price.

It's not that East Asia's central bankers have decided on self-obsolescence, en masse. They're doing something more predictable – firing the opening shots of what's widely seen as a new currency war in the region.

It all started when the Bank of Japan cut interest rates unexpectedly at the end of October, helping to push the price of the yen down, relative to the US dollar. This move boosted its exports.

Now Japan's competitors, Korea and China, have followed suit. The People's Bank of China announced rate cuts last week, apparently to check the price of the renminbi relative to the yen.

As Nasdaq's Tillier has pointed out, it helps to look at both sides of a currency pair, even if you are a bitcoin obsessive.

Bitcoin-yuan trading accounted for 76% of trading volume in the last six months, according to Bitcoinity. If the yuan is going to get cheaper, then bitcoin grows in value.

Of course, the usual caveats about BTC/CNY trading volumes from the major exchanges dealing in that pair apply. While the trading volume figures are likely amplified as a result of their no-fees trading model, it's not often that bitcoin bulls can celebrate the monetary policy moves of central banks.

US Marshals worry bitcoin markets... again

Possibly pulling the price in the opposite direction, however, the US Marshals Service (USMS) has announced an auction of 50,000 bitcoins that belonged to accused Silk Road mastermind Ross Ulbricht in December.

The agency is using the same format as the July auction of 30,000 coins that was won by venture capitalist Tim Draper.

Is another auction going to help or hinder the bitcoin price? Let's review what happened in the July auction. The run-up to the bid submission deadline saw the price rise gradually, from $444 on 18th May to $579 on 26th June. The auction took place on 27th June.

Rumours swirled in the following days, as the USMS began a slow drip of information about the auction. On 1st July, the agency said the coins were won by a single bidder – Draper as it turned out, who outed himself the following day.

Bitcoin markets appeared distinctly nonplussed by Draper's unveiling, if the price is any indicator. The price hovered in the $600s for much of the month, only to begin a steep downward decline in August. That slide hasn't really stopped since.

So another auction – this time with two-thirds more coins on offer – may not be the sort of news traders hoping for a much-needed rally want to hear. Tim Draper has announced that he will bid this time too.

Disclaimer: This article should not be viewed as financial advice. Please do your own extensive research before making investment decisions.

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