The Not-so-Great News
Bitcoin has been in a (mostly) negative trend from its high (~1175) to, as of today, a low of 165, since early 2014. It has also been associated with negative news across the year, concerning: bitcoin theft, shoddy exchanges, illicit uses, etc.
Bitcoin has been a victim of its own “success” in terms of asset valuation. The ascent to the > 1000 price was largely built in the Nov – Dec ’13 period, and naturally the coin is reverting to sustainable levels.
Unfortunately, the ascent to 1000+ was associated with a period where 2 algos were aggressively buying ~600,000 BTC from Mt Gox. It is believed (though not confirmed) that these algos may have been used to perpetrate the fraud that stole the similar amount of bitcoin from Mt Gox (and its user base). In other words, the algos may, through aggressive buying, have set up the momentum that took the price from sub $200 to over $1000. The whole movement may have been ignited and sustained by a fraud. See this analysis.
Bitcoin now is in the perfect storm of:
- likely slow liquidation of stolen bitcoin (how much is left, hard to know)
- Evidence showed that above algo started to liquidate in early 2014, however could not have liquidated the complete holdings (unless through another agent).
- liquidation of mined bitcoin as miners are desperate to recover what they can in a fallen valuation
- A significant amount of mining infrastructure was invested in on the basis of inflated BTC valuation. With adjustments to hash difficulty this may normalize, but for now should pressure miners to liquidate.
- financial markets in disarray, triggered by the falling oil -> commodities -> EMG, Equities, etc.
- Expect this to leak into the BTC market as well.
- More news of stolen bitcoin
I believe Bitcoin and cryptocurrencies in general will recover however. The negative impact of all of the above makes it very likely that BTC will sink further before it recovers (so far today it hit a low of $165).
The shake-out from this has and will increasingly give rise to more secure financial technology as opposed to the quick-and-dirty implementations (such as Mt Gox’s php travesty). That said, developing carefully and with appropriate safeguards is not easy, especially in the context of a startup racing to get a product out the door.
So why am I (still) interested
Bitcoin is one of the most transparent marketplaces (if not the single-most). For example:
- trades are labeled in terms of which side aggressed (buy or sell)
- buy/sell imbalance
- orderbook resiliency
- orderbook information is very useful (not as obfuscated with the games in other markets)
- OB slope & resiliency
- OB prediction modeling
Where it lacks:
- low-liquidity compared to more traditional assets (but enough for smaller operations)
- futures / forwards market is very low liquidity
- shorting can be difficult
In short, like many new markets & asset classes, there is often wider opportunity for earlier participants. Markets tend to tighten as they mature.