This week on Planet Bitcoin - 6 November 2015

Friday 06 November 2015

Another week has passed on Planet Bitcoin - and what a week it has been.

As you’ll remember, last week saw a terrific run-up to a year’s high around $330 - decisively breaking out of the long pattern of bouncing up and down between $220 and $280. Bitcoin had only moved above $300 twice since January, and on both occasions it was driven by short-term concerns - Coinbase’s hype around becoming a ‘regulated’ exchange, and Greece’s near-default. In both cases it proved unsustainable and lasted less than 24 hours.

Weekly chart

This time has proven very different. Not only was there no retrace below $300, but the rise from a baseline around $250 just a month ago accelerated. On Thursday, having risen quickly but steadily to $400, money flooded into the exchanges, pushing the price up above $500 (Bitstamp) in less than a day.

This did prove a case of too much, too soon. The round number of 500 - and, as significantly, its Chinese equivalent of 3,000 CNY (around $470) - was too much of a psychological barrier. At that point, profit-takers sold and the crash was even more swift than the rise. Since then it has moved between around $360 and $400, though this is likely to change at short notice.

Around the bitworld

You don’t have to go far to explain this dramatic change of fortunes for bitcoin. There has been a lot of good news about bitcoin recently, in terms of regulation and infrastructure. Over $1 billion of VC money has been invested in bitcoin projects this year, much of it in America. The reality, though, as with every other large move in the markets, is that China lies just behind the scenes. There are two or three minor reasons, and probably one major one.

Firstly, one of the largest Chinese exchanges, BTCC, has recently enabled 20x leverage - attracting lots of new speculator-gamblers who always provided the core part of Chinese exchanges’ business. Secondly, the venture capital wing of auto giant Wanxiang group has announced a $50 million investment in Ethereum, which has likely raised the profile of crypto in general and led some people to speculate that the Chinese government will take a kinder stance towards bitcoin regulation. Thirdly, another huge ponzi scheme has created a substantial demand for bitcoin.

Beyond that, though, is the ever-worsening picture of the Chinese economy. You can read more about this in The Yin and Yang of the Yuan. Suffice to say that, facing a series of major challenges, the Chinese government has devalued its currency and tightened capital controls to stop investors pulling money out of the country. As the Greeks and Cypriots know from their own financial crises, bitcoin is an ideal way to circumvent such controls. This ‘real’ demand has been amplified by speculators jumping in, with predictable results. Volumes have been immense - 100,000 BTC per day on Bitstamp alone - as has volatility. It has been a long time since bitcoin jumped $100 in a single day, and dropped as much. The market is currently taking a breath, but it can’t last long. The Chinese government could intervene whenever it wants, as it has before, but until that happens we are going to be in for some very choppy times.

Finally, the alts have not had a good week. When bitcoin goes on a tear, speculators dump other currencies to get in on the action. That can have a devastating effect, and many have seen falls of 10-30%, or even more, at least in bitcoin terms. Money may come back into alts considered undervalued when profit-takers perceive the rally has run out of road, but there are never any guarantees.


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