Like mistaking the true process of biological evolution, many mistake the ebb-an-flow of supply-and-demand as oozing steadily from the pipes of commerce. The truth behind human action is more complicated than that, and the Bitcoin price over the past week has demonstrated that.
On April 10, Bitcoin climbed to a high $266 and closed at $124.9 the next morning before Mt. Gox, the leading Bitcoin exchange and de facto bitcoin price-fixer, went down for nearly a day. This was the bubble heard around the world, as during this time Bitcoin was the talk of the financial world.
When trading began Thursday, Bitcoin fell again to a low of around $65, before rebounding to sit around $100 through Sunday night trading.
Bitcoin began the year around $13.51. It’s percentage increase fluctuating around 750%. It has outperformed all other assets Year-To-Date, with Natural Gas up 27% since Jan. 1. The green line on top, BTC, would have to be extended 5.5 times to show bitcoin’s 2013 performance.
As I wrote at my blog Silver Vigilante in January:
In the last six months, according to Google trends, countries the world over searched the term “Bitcoin” for the second most amount of times since the digital currency was extremely volatile at the beginning of the 2011 summer. In December, “Bitcoin” was searched the third most amount of times in its history, behind June 2011 (the peak) and just this passed September.
Egypt historical peak search volume, September 2012.
Saudi Arabia, second highest search volume, December 2012
Kazahkstan, 2nd highest search volume
Pakistan, third highest behind February 2012 and June 2011
India, November 2012 second highest behind June 2011
Vietnam, August 2012 second highest behind June 2011,
Turkey second highest December 2012 behind June 2011
In Spain, December 2012 is third largest search volume behind August 2012 by one point, and the peak June 2011.
That Bitcoin is holding at $100 is ominous in that, should it fall below $100 and experience continued bad press and Mt. Gox exchange technical difficulties, the next stop could conceivably be $20, with some support at $30. On the other hand, in consideration of unrelenting demand by increasingly moneyed individuals and groups, it could continue the trajectory it was on during the bubble phase of March 15-April 10, finding support between $150-$300.
After months of gold and silver becoming cheaper in Bitcoin, the trend has reversed this past week, despite the break of key support for precious metals. Nonetheless, gold and silver have become more expensive compared to Bitcoin:
But Mt. Gox has been center-stage throughout a week of DDoS attacks on their server, failed customer service, locked funds and the volatile Bitcoin price largely due to how easy it is to disrupt the Bitcoin network by simply attacking the center for its unfortunately centralized exchange.
Mt. Gox held a Reddit “Ask Me Anything” on Friday for those worried by recent trading problems that culminated with a 12-hour trading halt. Currently, 20,000 new Mt Gox are being opened a day compared with the 60,00 opened in all of March, according to the website.
Mt. Gox explained some issues:
Our system was designed to handle 2~3x our normal load, but now we’re experiencing 10x the amount, which was difficult to prepare for (it takes weeks) with the sudden new accounts. We have two problems: the DDos and volume related to new accounts.
The trade engine is capable of accepting much more of a load. Within 2~3 weeks we will completely rewrite the trade engine, in the meantime we shut down the system today and installed a new server with the current trade engine. Of course, if we didn’t have DDos everything would be fine, so now we’re dealing with two issues at once.
Who is attacking Mt.Gox with a DDoS? “We cannot disclose details, but we have some ideas…Basically because by naming them it makes our job harder because they will move to protect themselves.”
Trading Updates too much to ask for? “We absolutely understand this. The fact is that we are programmers and engineers, not PR guys, and we are still building out our capabilities beyond technology and into servicing our customers better. So, yes, we’re moving on this now and have secured help.”
Question from pmarches: Does mtgox run as a fractional exchange? Meaning, do you have 100% of the bitcoins your users have deposited in your system? “NO. Everything is accounted for (BTC and money). Fractional reserve is absolutely against our principles. In fact 90~95% of BTC are held in cold storage.”
No matter how Mt. Gox plays this off, the jugular of the issue is that users have been unable to withdraw their funds throughout most of the turbulence. Many former capacities of Mt. Gox have been nullified. With Mt. Gox transacting 80-90% of Bitcoin transactions, Bitcoin has suffered.
But, Mt. Gox is not to be mistaken with the actual Bitcoin protocol, which itself has proven unhackable by even the world’s foremost hackers and engineers.
It is impossible to know if Bitcoin will rise and fall until an attack or sudden spike in demand falls upon the market. As Erik Vorhees, an early adopter of Bitcoin, wrote: “Guessing short term price movements is a fool’s game.”
In an Austrian’s eyes, some recent explanations for bitcoin’s price rise, which is really still the main story for Bitcoin in 2013, read as follow:
The emergence of respected online merchants such as Mega, NameCheap, Reddit and others accepting Bitcoin has proven that businesses see its value, thus leading to the price increase.
Europe’s confiscation of Cypriot bank accounts have led to an influx in Bitcoin purchasers, not so much in Cyprus, but in North America and Europe. This has led to greater levels of speculation upon the price of Bitcoin, with cliques of buyers-and-sellers pumping the price only to sell all at once, and buy in the aftermath of the ensuing panicked selloff.
FATCA regulations have driven individuals to bitcoin for privacy.
Venture Capitalists and other private investors, now moving into Bitcoin, also want Bitcoin at the best prices. While their bitcoin purchases help explain the price rise, they could also explain the volatility and even DDoS attacks on key websites. To DDoS a website, it costs under $500.
Gold and silver buyers, moreover, have moved into the Bitcoin market. Largely thanks to the work of Trace Mayer, many former gold-and-silver bugs have seen the parallels in Bitcoin to precious metals.
The recent FinCEN ruling could have been made at the request of venture capitalists who did not want to put money into Bitcoin only to see it shortly thereafter outlawed. Now, people can be assured the government sees it as just another financial instrument.
Mainstream press interest in Bitcoin has been parabolic. This has led to incredible “hype” around Bitcoin.
Many, many people who simply do not understand Bitcoin are now buying bitcoins due to its media-hype.
Thankfully, Mt. Gox does not act as the Federal Reserve. It can be supplanted based on simple competition or cooperation within the Bitcoin market. This time will come, and more alternatives, such as BitcoinATM, will pop-up online. Greater Internet and computer security literacy could secure privacy for future generations, and Bitcoin encourages this spread. A free market has been born, and it will experience high price volatility and a arm’s race of ideas and technologies built around it.