What next for the price of bitcoin in 2014? Bulls, bears and honey badgers

Wednesday 05 March 2014

Bitcoin has been through the mill in the first couple of months of 2014. From an all-time-high of around $1,200 in December, prices recently fell to less than half that – and at one point, briefly crashed down to just $400.

There were good reasons for the slump. Quite apart from the fact that bitcoin was clearly overvalued, the Gox débâcle hit the cryptocurrency hard. Markets hate uncertainty, and there was plenty of it around as CEO Mark Karpeles was less than forthcoming about what was going on. (Karpeles is still CEO, incidentally, since Japanese law requires that a new CEO is appointed before old one steps down – or, in his case, is summarily booted off the scene).

But that was just two out of twelve months. After the dizzying highs and sickening lows, what can we expect next?

Bitcoin’s price
Bitcoin is far more than a currency. It’s first and foremost a protocol: an incredibly ingenious way of solving an apparently unsolvable problem – how to transfer information (including funds) without trust and without a central authority. The reality is, though, that in our world the bottom line typically dictates how we view the success or otherwise of an idea, and so that is how we will approach bitcoin’s next 10 months.

A month ago I suggested that bitcoin would experience a deflation in price rather than a crash. Although it was clearly overvalued, the apocalyptic predictions of the mainstream media’s economists didn’t ring true – especially when many of these self-evidently did not understand bitcoin at all. To repeat myself, being overvalued does not mean something is worthless. The dotcom bubble and crash taught us the same: some companies (like boo.com) disappeared altogether. Others, like eBay and Amazon, survived because they had real IP and a strong business case behind them. This is also true of bitcoin. Consequently I, like many others, see the long-term trend as firmly up. As bitcoin’s infrastructure grows and more businesses start adopting it, I’d expect to see its price recover, since it will now be underpinned by something real. With luck, we’ll finish the year in better shape than we started it – perhaps significantly better. But then there’s the short-term...

Gox was bitcoin’s Lehman Brothers: the failure of a massive institution that sent shockwaves through the system and called into question some of its most dearly-held beliefs. There are, of course, significant differences. One piece of good news is that life moves blisteringly fast on planet bitcoin. Not only is there no such thing as ‘too big to fail’, and therefore no taxpayer bailout and resulting contagion for the bitcoin ecosystem, but the course of the ensuing crisis is hugely compressed. Gox has been a millstone for bitcoin for a long time. It deserves recognition as a trailblazer, and without it bitcoin would not enjoy the popularity it now does. But it was badly, perhaps even criminally mismanaged. Once it is out of the way, bitcoin can properly recover.

The Gox fiasco is now largely priced in, and it looks like we could be out the other side already. But uncertainty is always bad for the market, and plenty of that remains. The bankruptcy proceedings will drag on for months and possibly years. There is also the question of what actually happened to those 850,000 ‘missing’ coins, with a current market value of over half a billion dollars. If they are missing for good due to lost private keys, the supply of bitcoins just went down and prices should rise; if they were stolen, then someone is in a position to flood the market and drive the price floor-wards. The implications are huge, and we need to know more before investors fully regain their confidence. Then there is the uncertainty about what Gox’s plans are next. A statement on the Mt Gox website claims that the company intends to continue operating with the hope of repaying at least some money to its creditors.

Gox’s supposed leaked internal ‘Crisis StrategyDraft’ suggests the same. This document gives 1 April as the relaunch date for the new Gox. (In my mind, April Fool’s Day was probably the worst day for Mark Karpeles to choose in one of his final acts for the shattered company: Gox has been a joke long enough.) This will bring a degree of optimism, as well as derision: the bitcoin community is sick of Gox. Net result, further uncertainty.

Bears and bulls
For these reasons, I have been firmly bearish about bitcoin for the last few weeks. A combination of public sentiment, common sense and technical indicators pointed firmly in the downward direction. Until yesterday (3 March).

Technical analysis is an arcane and tricky art. Surf the speculation forums of bitcointalk.org and you’ll find plenty of irrational exuberance and doubt about bitcoin, but just a handful of traders who really know what they’re doing. And until today, almost all of the ones I respect (who make a living out of it) were bearish. Having tested a low of $400 recently, and with no reason for things to change, most expected a further drift down to the $400-500 range. Few, it might be said, expected the price to drop much lower, so one way or another it looks like the worst is behind us.

Then, against all expectation, a firm reversal to the trend occurred. There’s some suggestion that this was a market manipulation by a ‘whale’ with vast amounts of capital at their disposal – in the comparatively small market that bitcoin represents, this kind of manipulation is still possible when volumes are very low, as they had been. (At one point, Bitstamp recorded a 24 hour volume of less than 5,000 btc.) Even if that accusation of manipulation was true, though, the nudge could easily generate its own momentum.

However, a look around the world suggests that there might be other reasons. One is the situation in the Ukraine. The Russian rouble has crashed to an all-time low, and currency changers are running out of dollars as the people look for a safe haven. It’s likely that some have been panic-buying bitcoin, too.

On a more positive note, the UK tax authorities have clarified their position and stated that bitcoin will not be subject to tax. This is a huge boost for bitcoin businesses in the UK, and it looks as if London could become the world capital for bitcoin enterprises. The Bitcoin Foundation told the Financial Times that it would be relocating to London as a result. This is outstanding news, not just for the UK but for bitcoin in general: it’s finally a positive story in the wake of an unrelenting diet of Gox-inspired bitcoin hate. Then there’s the new bitcoin bank that has opened in Cyprus, the new stores that are accepting bitcoins around the world, and the ATMs that are springing up everywhere.

Challenges remain. Fairly or unfairly, bitcoin has to earn or re-earn its reputation after the damage that Gox did. From this point, growth will have to be secured the hard way. Very like the aftermath of the dotcom crash, there will be no free lunch. The good news is that any growth is far more likely to be real this time, rather than the froth of last winter.

I don’t buy the irrational exuberance of those who think bitcoin is going to the moon again – another order of magnitude growth in such a short time is too much to ask. But there are finally reasons for optimism, in the short term as well as the long. Bitcoin has long had a reputation as the ‘honey badger’, and it looks like we’ll see it shrug off the bad news and do its own thing again before very long at all.

Brandon Hurst

Brandon Hurst

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