Does Bitcoin’s Falling Volume Herald a Bull Run?

Danny Bradbury
May 11, 2014 at 13:30 UTC
Updated May 12, 2014 at 16:38 UTC

What’s happened to bitcoin transaction volumes? Over the last month, the number of bitcoins changing hands has dropped considerably.

In April, 109,932 bitcoins per day exchanged hands on average. That compares to 187,811 in March – a 41% drop.

This has continued a little into May. On 4th May, it sunk further still, with just 52,042 bitcoins changing hands in a day. Bitcoin has been lower than this before, but not for a while.

This chart shows that it only dipped below this figure three times in 2014 – twice in April and once in March. Before that, trading volume hadn’t been this low since 2011. What’s going on?

Bitcoin hasn't seen transaction volumes this low in a while.Bitcoin hasn’t seen transaction volumes this low in a while.

Gil Luria, Managing Director at Wedbush Securities, an equities firm that tracks the bitcoin market, said:

“If I was to narrow down to one factor, I would say China. If we talk about the ascent of bitcoin last year, it would be down to unencumbered growth with China.”

If bitcoin’s fortunes rested heavily on the increasing role of China-based participants in the market, then no wonder volume is falling, given the turmoil there, and its chilling effect on bitcoin.

The China Syndrome

Industrial and Commercial Bank of China (ICBC) became the latest bank to block bitcoin in China this week, following a string of others that have done the same.

All of this has led up to a publicised but unofficial prohibition deadline of 10th May, allegedly imposed by the People’s Bank of China (PBOC), by which date banks should have officially made a statement on the issue.

China’s media ban of the Beijing-based Global Bitcoin Summit is the latest in a long line of aggressive moves against the cryptocurrency.

That would certainly tie into the falling volume in bitcoin transactions. China currently makes up 7% of all bitcoin exchange volume. Exchange volume in China is apparently a little muddy, following allegations of faked volume figures by some Chinese exchanges.

Does this signal a failing enthusiasm for bitcoin? The community certainly seems to be trying to raise awareness, the way that many communities do when they want to bolster their message: sports.

One kickboxing event was rapidly followed by another, and now, people are floating the idea of UFC sponsorships. Anything to get bitcoin into the spotlight.

China’s role in bitcoin may be deflating by the day, but this is unlikely to affect transaction volumes in the long term, said Luria. “The success of bitcoin will happen regardless of China,” he argued.

“The impact is only a short-term trading impact. If there are disruptive businesses that emerge out of these technologies, then whether China participates is its own issue.”

Follow the numbers

China may have something to do with bitcoin’s price, but some people prefer not to look at the markets.

Walter Zimmerman is Chief Technical Analyst for United-ICAP, an energy trading advisory firm which also tracks bitcoin. He relies on chart data, rather than political and economic events, when it comes to developing trading strategies.

Zimmerman argues that we’re nearing the end of a downward price movement, which explains the volume drop-off:

“There should be a drop-off in volume in the latter stages of a falling wedge pattern.”

By relying on price movements for its intelligence, technical analysis hopes to be able to predict market movements more effectively.

This is a long-established method of market analysis, although fundamentals analysis and technical analysis are like competing religions in finance – followers of one discipline rarely have much time for the other.

The falling wedge is an inverse triangle, created as a price progressively falls. As they fall, prices bounce up and down, reaching upper and lower limits before reversing, but the general trend is downward.

The lower and upper lines bounding these limits are called support and resistance lines, respectively.

This chart (produced by CoinDesk but mirroring one provided by Zimmerman) shows this downward falling wedge starting around bitcoin’s height, just after December, and continuing until now.

rsz_narrowwedge2

Speaking to CoinDesk earlier in the week, Zimmerman said he thought bitcoin was about to break out of this cycle and embark on an upward trajectory.

“The price gets further away from the falling wedge support line and spends more time up against the falling wedge resistance line. Instead of bouncing up and down, the market becomes tracked to resistance,” he said, arguing that this is what has happened in the last half of April (see red bracket in our chart).

Challenges for technical analysis

Not everyone is a believer in technical analysis. Common criticisms are that you can draw the lines any way you like, and so fudge the picture to fit a theory, especially if you look at different time periods to find your trends (see the first comment in this thread on falling wedges in bitcoin).

However, Zimmerman maintains that it’s a solid theory, and said that he always looks across an asset’s entire history before plotting his lines.

The other worry about using technical analysis for bitcoin is that it isn’t a particularly liquid asset. Events like China’s cooling towards the currency, or Mt Gox’s collapse, naturally cause big fluctuations in price. Zimmerman claimed:

“I have no qualms with looking at relatively illiquid markets, because in a reversal of expectations I have found that time and again, it’s these quiet little markets that hardly anyone knows about – where the high frequency trading hasn’t penetrated yet – where you’re likely to find the most perfect technical patterns.”

Many readers will take umbrage at any description of bitcoin as a “quiet little market”, but it is worth remembering its characteristics, which set it apart from many others.

In particular, it may be labelled a cryptocurrency, but for many people, it’s still an investment asset, and with the market falling, people may be holding bitcoins in the hope of a rally.

[post-quote]

The likelihood is that both China and market sentiment are contributing to the downturn in volume. That also suggests that it’ll be a temporary blot on the bitcoin landscape.

Statements in this article should not be considered investment advice, which is best sought directly from a qualified professional.

Dripping tap picture via Shutterstock

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