Markets Weekly: Questions for Bitcoin Price After Torrid Week

Jan 12, 2015 at 14:52 UTC
Updated Apr 14, 2015 at 14:21 UTC
NEWS

It’s been a tough week for the bitcoin price.

Trading closed on 5th January at $272.95, losing 2.78% over the week to end on 11th January at $265.37, according to the CoinDesk Bitcoin Price Index.

With prices trading below $300 for the first time in a year, Bitstamp revealed that it had lost $5m in coins during a security breach. It pulled the plug on trading for four days as its team scrambled to migrate its systems and introduce new security measures.

During the outage, punters drew comparisons to the suspension of trading at Mt Gox, which signalled the end of that once dominant venue for cryptocurrency trading. While Bitstamp management issued updates on their efforts to get the platform back online, the exchange also missed self-imposed deadlines for the resumption of services, adding to the worried speculation.

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Trading volumes rise

Despite last week’s weekend price crash and the outage at one of the largest USD/BTC exchanges, total trading volume across exchanges rose. Data from Bitcoinity shows a 10% increase in traded volume, from 2.25 million coins in the week ending 4th Jan to 2.49 million coins for the most recent seven-day period.

Some exchanges appeared to have reaped the rewards of the four-day Bitstamp outage. ANXBTC showed a 75% increase in traded volume, compared to a week earlier with 87,000 coins changing hands there. Bitfinex, which regularly sees more traded volume than Bitstamp, recorded a 30% increase in volume, or 203,652 coins traded. BTC-e also displayed a rise in volume, albeit by a smaller proportion of 18% to 60,000 coins traded.

With even the largest and most reputable exchanges vulnerable to being taken offline by hackers, at least some bitcoiners appear to have reverted to a less centralised way of converting their coins. The second-largest volume gainer in percentage terms however was LocalBitcoins, the peer-to-peer trading platform. LocalBitcoins saw a 46% jump in traded volume in the last week with 18,759 bitcoins changing hands there.

Even with the Bitstamp outage this week, the price shed only about $7 or 2.8% week-on-week. The biggest intra-day swing for the week took place on 7th January while Bitstamp was down. The price achieved a high of $300.30 and a low of $282.06, making gains for the day.

Where does price go from here?

To put this in perspective, devoted bitcoin watcher Martin Tillier at the Nasdaq’s trading blog points out that the US dollar has been devalued by the Federal Reserve’s quantitative easing measures to the tune of about 10%. Bitcoin meanwhile has only grown in utility since the halcyon days of its storming bull-run at the end of 2013. That run started at around $125, so Tillier suggests that fair-value for a coin should be around $140 today.

Tillier recommends going long if the price holds above $250, but cutting losses if the price falls below that level, because a drop under $200 could well take place.

Similarly Gavin Smith at derivatives offerer First Global Credit recommends watching for the price to cross the psychologically important $250 level. Smith is going long but with plenty of stops placed on the way down to $250 and under.

“I recommend a very disciplined use of stops at the moment as a further slide can’t be ruled out,” he wrote on his company’s blog.

Derivatives exchange BitMEX takes a slightly more bearish view. Its weekly Crypto Trader Digest recommends subscribers take advantage of “lower lows” as the price will head for $250 and then $200. But even as traders short the bitcoin price, they must remain vigilant to a “short squeeze”, where the price moves against them and forces them to close their positions at a loss.

“Monitoring the level of short swaps on Bitfinex is a must. A successfully executed short squeeze could send the price screaming above $300,” the Digest observed.

Some analysis for a longer time period is offered by leveraged trading platform BTC.sx. Its chief marketing officer Josh Blatchford applies ‘Random Walk’ theory, popularised by the Princeton economist Burton Malkiel’s 1973 best-seller ‘A Random Walk Down Wall Street’, to cryptocurrencies.

By BTC.sx’s analysis, the bitcoin price can be viewed as being part of a bi-annual cycle: a price rally followed by a random walk. This has been the case in 2011 (rally) and 2012 (positive random walk) and then 2013 (two rallies) and 2014 (negative random walk). The analysis stops short of calling a rally in 2015, suggesting only that volatility is expected to increase in late March.

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