This week on Planet Bitcoin - 20 November 2015

Friday 20 November 2015

Tl;DR: The bubble burst but bitcoin stays above $300 and remains stable for now.

After last last few weeks, the volatile markets have returned to a period of stability for a while. In fact, they have been remarkably calm given the huge volumes and price swings of the recent past. For most of the last week bitcoin has traded a little above the $330 mark, only dropping significantly below this for a day, when it fell $10, only to repeat the same movement in reverse 24 hours later. Come the end of the week the same has happened; whether this is the standard weekend dip or something more pronounced will have to be seen.

Chart

The chart for the last month follows the pattern for just about every speculative bubble in history

The drop below $320 notwithstanding, the overall picture is encouraging, since the longer bitcoin remains in the $300s the more traders will regard this as a fair price - just as the majority of this year has been spent in the $200 range. It was clear that the rise to $500 was unwarranted and unsustainable, and the risk was always that it would plunge back down to the $250 level, from where it started. That hasn’t happened - at least, not yet - and this should be taken as a positive sign.

The anatomy of a bubble

Zooming out to the monthly view, the chart is a study in bubble psychology. It may not have been as impressive as the rise at the end of 2013, but that is what the recent spike was - a miniature bubble, fuelled by signposts from China’s stance on capital controls, a handful of minor factors, and a wall of traders’ money looking to profit from the situation.

It starts with a gradual increase, in this case from the mid-to-high $200s. Growing but still cautious optimism causes the price to rise a little too fast, prompting some traders to have second thoughts and sell. But when the market proves that these sellers called it wrong (the ‘bear trap’), it provides a strong signal for buyers to abandon caution and pile in en masse, driving the price far beyond what can be considered reasonable. As the irrational belief that prices will continue to increase reaches its peak, the rise accelerates until the chart shows an almost vertical climb - at which point, optimism evaporates almost instantly. A sharp fall follows, then an almost immediate recovery as speculators who believe the market is over-sold buy it back up again, often almost to its previous high: the ‘double top’. After that, reality reasserts itself and the price falls sharply again, eventually returning to something like its long-term trendline.

Allowing for minor variations, this is the pattern for just about every speculative bubble in history. In this instance, the take-home point is the return to the trend. Bitcoin was rising steadily and sustainably before mania overtook the markets, causing the price to double within the space of a month. As things stand, it appears to have reverted to where it would be on that medium-term trendline.

Elsewhere in Bitland

The terrorist attacks in Paris have loomed large in the news this week, and cast a shadow on the cryptocurrency sector too. The events of Friday 13 have re-opened arguments about the use of strong encryption and whether companies should offer services that are effectively opaque to the security services by design.

Moreover, virtual currencies themselves have come under scrutiny, after reports that Islamic State has addresses containing some $3 million in bitcoin. This has yet to be verified, but will once again play into the narratives of those who decry digital money as a tool of fraud, money laundering, organised crime and terrorism.

If the market’s indifference to these reports is anything to go by, and claims that the EU will seek to ban digital currencies as a result, then we don’t have much to worry about just yet.


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