Bitcoin - Down or Up? Week over week, still up!
The Bitcoin exchanges showed some significant volatility in the exchange rate recently, with the price swinging down at one point to $13, a nearly 60 percent drop from its high earlier in the week.
There are a number of words that might describe what is occurring but Jason Mick chose the wrong one. He published an article in Daily Tech using the title: Digital Black Friday: First Bitcoin “Depression” Hits. The Wikipedia article reads:
In economics, a depression is a sustained, long-term downturn in economic activity in one or more economies.
To understand what is going on, consider:
A lot has happened in the past days. Week over week, bitcoin’s market rate is still up though. There are many who are fixated on Bitcoin’s exchange rate. That’s not the metric that should matter.
Bitcoin’s transaction volume is very active — over 10,000 transactions per day most recently. Those numbers show Bitcoin’s progress much more than what is said by the results of a price move when heavy selling is occurring. Those desiring to buy bitcoins at these selloff levels weren’t (and still aren’t) able to do so due to the delay in moving funds into the exchanges.
For those who are new to bitcoin, know that it does not trade like other markets. For instance, Bitcoin trades 24x7, has no futures market of any significance, and at least on the leading exchange, “market orders” are simulated through the use of limit orders using the current market price as the default.
During periods of volatility spreads become incredibly wide. Traders respond accordingly by placing multiple limit orders each at a smaller amount. The software at the exchange was not engineered for this level of trading volume and many traders saw their attempts to place orders during the peak periods met with an error message. As a result, a party determined to move a large amount of funds will likely overshoot the mark — a phenomena which we see often on the way up as well.
Nobody knows where the market price will level off at, if and when it does. Mining is generating bitcoins at a torrid pace with 11,550 BTC generated in the past 24 hours. The next difficulty adjustment will force mining generation back to its targeted 7,200 BTC per-day rate though but the current above-normal production does add to the daily supply and put downward pressure on the market rate.
Using the BTC/USD weighted 24-hour average those 11,550 BTCs represent nearly a quarter-million dollars worth of bitcoins issued daily. If miners are not hoarding, then that means nearly a quarter-million dollars worth of fund inflows are needed just to offset the amount of currency issued. Ben Bernanke issues more than amount each time he blinks but for Bitcoin that amount of currency issued reflects inflation of the currency at an annual rate of more than 64% in a year.
This week’s launch of another exchange, TradeHill, adds new currencies that may be traded for bitcoins. It is now possible for the Chilean Peso (CLP) and the Indian Rupee (INR) to be deposited (bank transfer) with the exchange and to be withdrawn from the exchange as well. Also accepted for deposit is the Peruvian Nuevo Sol (PEN).
Had the BTC/USD been at $16 and change one week ago today it would have been been at a record high and the currency would have been seen as continuing on its ascent. Seeing the level at $16 just seven days later doesn’t indicate much less is occurring.
Ars Technica writer Timothy B. Lee (@binarybits) checks in on Bitcoin on the one-year anniversary of the “Bitcoin Bubble”. Excerpts:
“But since it hit bottom late last year, the cryptocurrency has defied skeptics (including me) who predicted it would prove to be a passing fad.”
“Mobile Bitcoin apps for Android are now available. Unfortunately, [Gavin Andresen] said, “iOS has been a struggle just because Apple for whatever reason has decided they don’t like Bitcoin handling on their platform.”
“Future Bitcoin clients will support multisignature transactions, in which a user’s private key is split up among multiple devices. With this feature enabled, compromising any single device won’t allow an attacker to spend the Bitcoins in a user’s wallet.”
“[Jerry Brito argues] that Bitcoin’s relative anonymity and the lack of intermediaries gives it a crucial advantage for ‘illicit stuff: drugs, gambling, pornography, getting money out of countries where there are restrictions on moving funds. That’s where it’ll establish itself first.’”
“Regulations that tried to ban ‘transmitting numbers that represent some value over the Internet’ could hit startups that offer gift card trading or mobile check cashing. ‘It’s a real challenge for regulators who are working with laws that were written for atoms, not bits,’ [Gavin Andresen] said.”
“Disclosures: The author [Timothy B. Lee] owns some Bitcoins.”
Bitcoin Ends Month Up 28%, Quarter Up 36%, Year Up 41%
Though Bitcoin may never again see gains in a quarter like it had seen in last year’s second quarter, the chart for this April through June period on the calendar which just ended saw a pretty decent gain as well.
For the month of June, 2012 the closing price of $6.69 was a dollar and a half above the previous month’s close giving a 28% gain for the month. The first quarter had closed at $4.90 so the closing price for 2Q2012 shows a gain of 36%. For 2012, where the price opened at a $4.72 level, the price rise from January 1st now exceeds 41%.
Unlike previous rallies for Bitcoin, this one occurred without there being a major story or significant level of media attention. With Bitcoin being new to most people yet, such attention normally draws interest from a wider community who then wish to own some of the digital currency .
This doesn’t mean that June was a particularly quiet month for Bitcoin though.
Instability in Europe due their financial crisis made Bitcoin useful as both a store of value and also as a tool for transferring money to other destinations. The Bitcoin exchanges offering BTC/EUR trading all saw record monthly trading volume levels and most of the other European currency markets such as the BTC/GBP (British pound sterling) and the BTC/PLN (Polish zloty) broke monthly volume records as well.
Even exchanges that trade bitcoins against non-European currencies but cater to customers from the region saw record months. BitStamp, known for having a very accommodating SEPA payments policy, traded more through its BTC/USD market in June than it had in all previous months combined. VirWoX monthly volume broke its previous record and BTC-e, home for the second largest BTC/USD market, nearly tied its previous monthly volume high as well.
This doesn’t mean trading market share at other exchanges was simply just grabbed from the leading exchange, Mt. Gox, however. Though Mt. Gox’s monthly volumes are still down more than half from where they were in January, volume on its BTC/USD market saw $8.3 million worth of trades occurring in June — a 32% increase over May 2012’s monthly volume.
Though the reasons for the increase in volume at the exchanges can be easily explained, the reasons for the increase in the price are more difficult to pin down.
Of course, the upcoming drop in the block reward (expected to occur in early December) is likely one reason. When that event occurs, the rate of currency inflation will drop from the 25% per-year level to just 12.5%. Because this is known in advance, however, speculators may already have this change priced in to the exchange rate and thus no further price appreciation will necessarily occur after that event occurs.
Another factor affecting price may be just a one-time event.
Since May when Bitcoinica suffered a security breach that keeps it shuttered yet today, there remain few methods to go short on Bitcoin — to speculate that the future price of bitcoins will go down from current levels. Ironically, most of the funds from traders wiling to take that bet are still stuck at Bitcoinica which only recently starting returning some funds as it continues to work at reconciling its customer accounts.
While aspirations to fill the void that followed Bitcoinica’s exit are numerous (Kronos.io, options at MPeX, BitcoinOPX, various approaches involving assets listed at GLBSE, and binary options through predictions markets even) traction anywhere near the level Bitcoinica held remains far off, at best.
But there’s a more immediate development likely affecting the price as well.
The most significant conversion of funds out of bitcoin occurring today happens to be coming from those who are, ironically, enthusiastically showing their trust in Bitcoin’s future!
Announced formally in June was the new product line from Butterfly Labs for their ASIC-based hardware. This development changes the landscape for Bitcoin mining operators entirely.
Because of the profit potential in being among the first to start mining with these breakthrough devices, pre-order sales placed just to get a position in line have been at astounding levels.
Mining operators who held bitcoins are now spending them (particularly because priority processing on orders is given to those paying with bitcoins), but the proceeds from each sale are then converted to dollars. Even that significant new supply of bitcoins being sold at market appears to not have much of an impact on the exchange rate as the the June month-end level is near its mid-month high.
Miners took in the 226,750 bitcoins that were issued (also referred to as being “mined”) during the month. Using the average daily valuation of $5.99 the value of these bitcoins issued totals a little over $1.35 million. Along with the rising exchange rate, mining profitability has been rising as well. Offsetting the rise in the exchange rate was an 8.5% increase in the mining difficulty but even so miners milking their GPUs a while longer yet have little to complain about.
But Bitcoin does not and cannot exist solely to benefit those mining and though millions of dollars worth of trades are occurring on the exchanges each week, those trading volume levels are likely for the most part due primarily to speculation.
Even if these trades were entirely for funds passing through the exchanges to facilitate commerce made using bitcoins, the actual transaction volumes seen on the Bitcoin payment network today are likely still too low to justify the current $62 million USD aggregate currency valuation for Bitcoin.
The use of the currency is showing evidence of it gaining traction, particularly as its footprint expands globally and also for its use in gaming. Taking advantage of Bitcoin’s blockchain for accepting wagers, SatoshiDICE is alone responsible for more than half of all bitcoin transactions occurring each day,
Though Bitcoin is an ideal payment network for eCommerce (evidenced in part with BitPay's merchant base now exceeding 600 merchants) it also has the technical ability to function well for retail point-of-sale. Such use is not common though yet. Even claims of fantastic Bitcoin uptake at PorcFest aren’t enough to attract retailers in any significant number.
A hurdle needing a breakthrough is the resistance by Apple which evicted all Bitcoin wallet apps from its App Store.
Bitcoin will be hamstrung if all users of iOS devices would be excluded from participating due to this anti-competitive action from Apple.
In the absence of a mobile app, alternative methods including Blockchain.info’s new send bitcoins via SMS service won’t mean all iPhone users will be completely left behind.
And though consumer grade Bitcoin apps are flourishing on Android the point-of-sale options available to merchants just aren’t there yet to cause widespread adoption.
This situation could change entirely though if the BitcoinCard, expected early in 2013, ends up gaining traction.
The question as to what caused this past quarter’s exchange rate boost remains unanswered though for most of us. Even more baffled as to what propels Bitcoin forward are the skeptics and those formerly skeptical about bitcoin’s chances of staying strong.
While there’s nothing new about a volatile financial instrument gaining 30% in a month, what becomes interesting is that this gain occurs at the same time other commodities such as precious metals and crude struggle.
The Bitcoin community has been growing, that’s been obvious. This chart, for example, shows that traffic on the BitcoinTalk forum is up over 50% from levels seen at the beginning of the year.
Thanks to easier methods to acquire, store and transact in bitcoins, the currency can expand beyond its bleeding edge early adopters and become usable to those who are less-technical and to those whose motivation is not mainly political.
With a wider base holding bitcoins, the currency becomes less vulnerable to selloffs. A speculator unloading bitcoins generally has one option — to cash out at an exchange, whereas smaller investors and consumers holding bitcoins can cash out by spending their coins on goods and services.
Whatever the reason for the second quarter gains, it may finally be time that expansion of the Bitcoin economy will occur from these gains as well.
Bitcoin Ends July Up 39%, YTD 2012 Now Up 98%
The bitcoin exchange rate ended July 2012 with nearly a 40% gain — the biggest monthly gain so far this year.
The July BTC/USD closing price of $9.35 means a bitcoin cost two and a half dollars more than when 2Q2012 ended.
For 2012, where the price opened at a $4.72 level, the price rise from January 1st now exceeds 98%.
The algorithm that governs the rate of bitcoin issuance (one of the products of “mining”) readjusts so that over time issuance is at the same rate. Between adjustments however, issuance can occur at a slightly higher rate when there is more mining activity. This is what happened in July where the price rally occurred even with the daily average issuance rate coming in 2% higher in July than in the month prior.
The 238,650 bitcoins issued which Bitcoin miners took in during the month is valued at $1.93 million using the average daily valuation for the month of $8.12. Along with the rising exchange rate, mining profitability has been rising as well.
The 39% rise in the exchange rate for the month is offset partially with the increase in the mining difficulty. Since that increase in difficulty was less than 18% though profitability rose to levels that haven’t been seen since January.
Though mining hardware can use off-the-shelf GPU and PC hardware, a large amount of the increase in capacity added during the month can likely be attributed to volume shipments of a variety of FGPA models. To the left is a photo of mining operator darkice with new “BFL Mini rig” hardware, each of which costs about $15K USD.
Mining operators who were constrained by electrical circuit limits using GPUs are now able to add capacity using FPGAs due to their vastly lower power requirements.
If a very large amount of funds hadn’t gone towards pre-sales of an FPGA successor, the BFL product line branded “SC”, there would have been an even larger amount of FPGA capacity brought online by now.
Because of the millions of dollars going towards the purchase of mining hardware and towards pre-sales of technology still at the R&D phase, many miners are actually bitcoin-poor — they’ve used their mined coins as investment capital for new equipment.
The trading volume at the exchanges with customers from Europe continued at a record pace in July. The BTC/EUR (Euro), BTC/GBP (British pound sterling), BTC/PLN (Polish zloty) markets saw volumes up 20% or more and markets at exchanges where SEPA payments are accepted (such as the BTC/USD market at Bitstamp) also beat records for monthly volume. In all, for the month there were over 2.3 million bitcoins exchanged into and out of fiat and other virtual currencies.
If bitcoin is being acquired simply as a store of value then it becomes a risky investment as should the exhange rate take a pause or start to drop. Speculators become sellers and the rush for the exits only compounds the selling.
However, investment in bitcoin as an asset that might appreciate in value isn’t the only speculation surrounding bitcoin. Bitcoin is a pseudonymous digital currency. This means that identity is not required to receive, store and spend funds. Once bitcoins are acquired, financial transactions no longer need to go through the banking system.
This property has now been discovered by high yield investment program (HYIP) operators and the pace of participation only appears to be accelerating.
This should come as no surprise. One of the first online services to accept bitcoin was called the Bitcoin Randomizer and it did not hide its function. Randomizer advertised that it would issue payouts to earlier ponzi participants using the proceeds brought in from the most recent contributors. There was no deception and in the end, those that did lose a couple dollars worth of bitcoins when the operator shut the service down likely got their money’s worth from the entertainment value.
What has emerged since, however, is quite frightening. Professional poker player Bryan Micon (@DonkDown) has compiled a list of questionable investments, well “obvious ponzi schemes” as he describes them. Micon has experience with scams in the poker arena and has put some effort towards outing these HYIPs just as he has done using his website for outing poker-related scams.
Micon isn’t the first to call a spade a spade. The Bitcoin.org lead developer, Gavin Andresen (@GavinAndresen), commented that HYIPs are “(almost?) always dressed-up Ponzi schemes” and he makes a plea to participants to “please lick your wounds quietly when they implode”. Andresen showed prescience back at a time when bitcoins were selling for under a quarter dollar each when he remarked that “we’re in the Wild West days of open-source currency. I expect people will get burned by scams, imitators, ponzi schemes and price bubbles.”
There are likely hundreds of thousands of bitcoins or more (valued in the millions of dollars range) already involved in HYIP gambling and it is likely many of the bitcoins remain unspent by the operators. The result is an artificial demand for bitcoins. These bitcoins are not likely then being offered for sale at the exchanges, which might cause the exchange rate to rally on hardly any news without there being any other development that might help to explain why a 40% rise in one month might be justified.
Following the first collapse of a large ponzi (of which the largest is “in its final week or two”, Micon asserts) the result might be more than noticeable at the markets in the form of a sudden selloff — the pin that ends this latest Bitcoin bubble.
Or perhaps, since HYIPs existed long before Bitcoin was invented (with the OSGold HYIP collapse in 2002 being among the largest) the event goes down being little more than a learning exercise at the school of hard knocks.
Vitalik Buterin, writer for Bitcoin Magazine (@BitcoinMagazine), describes today’s rally that has taken the Bitcoin BTC/USD exchange rate above its high water mark from 2012. Excerpts:
“Today’s maximum of $15.68 at the time of this writing [is] the highest that the Bitcoin price has been since July 6, 2011.”
“The [network data] figures, which attempt to measure Bitcoin’s actual usage rather than public opinion or interest in the currency as search volume and all market statistics inevitably do, show the same pattern: the values rose during summer 2012, dropped off in the fall, but then began to quickly pick up again in November after WordPress started accepting the currency.”
“The 14-day average is also now as high as it ever was, and may well go even higher.”
Bitcoin Ends January Up 51%, Largest Monthly Increase Since 2011
For the month of January, 2013 the closing price of $20.41 USD was up nearly seven dollars from the 2012 year-end close resulting in more than a 51% increase for the month — Bitcoin’s largest monthly gain since December 2011. The one-year gain, calculated from the January 2012 close of $5.48 is whopping 272% and is illustrated in this chart of month-end closing prices:
January was a good month for other assets including stocks, the precious metal silver, and WTI crude. However not only did Bitcoin trounce them for January 2013, it dominated over them throughout much of 2012 as well:
The 111,100 bitcoins issued which Bitcoin miners took in during the month is valued at $1.72 million using the average daily valuation for the month of $15.49. Miners had been suffering ever since the block reward subsidy “halving” that occurred in November last year. With this spike in the exchange rate mining profitability for GPU miners is again at respectable levels, However that will soon change again now that there is at least one ASIC mining hardware manufacturer that has begun shipping.
Mining results will vary based on the Bitcoin mining difficulty, with automatic periodic adjustments that re-calibrate production so that it resumes at the targeted rate. The biggest adjustment to difficulty in 2012 was under 15% and at the end-of-year the difficulty was not even three times the level it was at when the year started. ASICs have the potential to do that same level of an increase (tripling) in just a matter of a couple months. A dollar’s worth of ASIC hardware performs hashing at the rate that is nearly two orders of magnitude over what a dollar’s worth of GPU hardware does so we are likely just a couple months (or less) away from seeing the end of any GPU mining that is profitable.
The total value of all bitcoins issued as-of the end of January (a metric that some refer to as Bitcoin’s “market cap”) is a number just under $220 milliion USD, more than $75 million greater than where it started at for the month. Certainly greater demand occurring due to Bitcoin gaining traction as a payments and money transfer system is partly responsible for a higher valuation but there appeared to be no massive jump that would account for the need for an additional $75 million worth of the currency. Thus a significant portion of the rise can only be attributed to speculative interest.
An attempt to quantify how much of a valuation rise was necessary to accommodate the rise in the use of bitcoin for transactions would require reliable data on the behavior of consumers who use bitcoins. Those procuring bitcoins for use in money transfer or for paying for purchases do impact the monetary velocity of the currency in a way much different from how those who are acquiring bitcoins for long term investment or for short term speculation even.
If this velocity metric has been studied, the results have not been shared publicly. What is shared publicly is transaction data that crosses the Bitcoin network. However since that data is both pseudonymous and includes indistinguishable “change transactions” which are sent back to the party making the payment, very little information about Bitcoin’s economy can be reliably gleened from it.
Most bitcoin market exchanges provide feeds with trading results in real-time and many volume records were broken in January. Additionally, several bitcoin-related companies have started sharing their results. The numbers coming out include BitPay’s announcement of having processed 10,000 transactions cumulatively from their 2011 launch through mid-January. Other metrics include impressive volume and growth numbers coming from online casinos — the first industry that cannot ignore Bitcoin.
Early in January Bitcoin Foundation executive director Peter Vessenes published his Quarterly Update in which he describes an increasing level of interest from investors and shared his prediction that in 2013 there would be Bitcoin “liquidity problems” (price increases).
With Bitcoin trading markets only having existed for a few years there isn’t enough data to conclude that there is a seasonal trading pattern. In 2012 the exchange rate dropped in February after a strong couple of months prior but then stayed level for a few months after that.
Those buying or holding bitcoins are trusting that Bitcoin’s current scalability problems are about to be resolved, that its exchanges are handling security better (the successful January hack against VirCurEx barely slowed them down), and that Bitcoin will not immediately see intervention by governments (being completely ignored by them is probably a temporary, one-time bonus).
But Bitcoin remains an experimental currency. As the software gets poked and prodded, new vulnerabilities are discovered. Some vulnerabilities will result in funds being lost while others — initially appearing to be quite scary will receive further analysis and be found to be inert. But most bitcoin users and investors and aren’t going to be monitoring chat channels or forum threads to determine if an event has occurred in which selling some coins would be a wise move.
Yet tremendous upside may remain that could be overshadowing the risks. Payments startups like Square, Stripe, Braintree, Dwolla and mFoundry aren’t publicly traded so their shareholders mostly consist of angels and venture capital investors. When any of these startups hits a “home run” (their product succeeds tremendously, or the organization is acquired, or they go public) it is the founders and shareholders who enjoy the tremendous financial gains. When a SatoshiDICE, BitInstant, CoinBase, or BitPay (all angel- and venture capital-backed Bitcoin-related startups) hits a home run, every person holding a bitcoin likely sees a rising valuation due to the increased demand for Bitcoin as a currency resulting from that startup’s success.
Bitcoin speculators also could benefit from another characteristic of the nascent digital currency. Without Wall Street’s participation there are few affordable methods to take a short position or to perform price hedging. Without this relief valve, wild volatility occurs as the market tries to discover Bitcoin’s price. It could go high, "really high" explains Trace Mayer of RunToGold.com.
With the last edit before publishing this monthly summary being composed nearly a week into the month of February and the exchange rate continuing to rise past the January close, there could be much more left to this rally.