January 2012 Wrapup
The Bitcoin exchange rate continues its upward march with a January closing price of $5.49 USD, a number 16.3% higher than the 2011 closing price.
Even with this gain the month-end price was still well below the month’s high when the exchange rate topped $7 several times earlier in the month. Much of the reason for that level being reached was likely speculation attributed to the currency being the topic of an episode in the television legal drama The Good Wife which aired in the U.S. on January 15th, 2012.
At the fundamental level, the month showed impressive growth in the number of transactions processed daily — though investors are cautioned that these bitcoin metrics are easily manipulated and to consider this factor before using these metrics when making investment decisions.
Additional progress is being made with the ecosystem surrounding Bitcoin. The financial intermediaries BitInstant and Paxum both added significant functionality that will help expand Bitcoin’s reach further, around the globe.
Just under a quarter-million bitcoins were issued (or “generated”, or “mined”) during the month worth nearly $1.5 million using the average daily valuation of $6.10. Mining is back to being moderately profitable for the miners paying typical electric rates using typical mining hardware though as happens normally, there is only a short lag after the price moves before mining difficulty will catch up such that profitability nears breakeven.
While there aren’t any single upcoming developments that are expected to have a major impact over the next weeks, Bitcoin is showing resilience with growth in its utility as a currency and also as a store of value. In 2011 it was January which was the month that things were relatively quiet and then February was the month when the pace quickened.
The Bitcoin exchange rate is no stranger to volatility and saw its share of it in February, 2012. The closing price of $4.86 is down more than 11% for the month but the currency still has a gain, just about 3%, for 2012 YTD.
The volume of trading during the month was fairly heavy even considering that the second largest bitcoin exchange, TradeHill, shut down mid-month. Some of the trading can be attributed to fund flows arriving at other exchanges following withdrawals from TradeHill. The biggest selling pressure for the month was likely a combination of the news that Paxum would no longer serve Bitcoin exchanges followed shortly by the TradeHill news. Those buying into the resulting selloff were rewarded when the exchange rate recovered and ramped back up — possibly as the result of developments at the fastest-growing Bitcoin business, Bitcoinica. Their very busy February involved a pre-announcement of future plans, the introduction of interest-bearing deposit accounts, the addition of AliPay as a payment method and a translation of the site to support customers from China.
A milestone of note occurred during the month when block 168,000 was reached and thus more than 40% of the 21 million bitcoins to ever be issued have now been issued. Later this year when the 50% threshold is reached the block reward will drop from 50 BTC to just 25.
A fundamental metric used to gauge Bitcoin’s traction as a payment network is the transactions processed daily numbers. The numbers did spike to levels that would indicate a tremendous gain in uptake, however the timing coincided with the TradeHill closure so the sudden increase in transactions is likely related to the transfer of funds following that event. As a reminder, this metric and others within bitcoin are easily manipulated so caution is warranted before considering using these metrics when making investment decisions.
Though there were no general availability releases this month of the “Satoshi” Bitcoin.org client, other clients such as Electrum, Armory and MultiBit advanced with new features and other improvements. Hosted services in the Bitcoin ecosystem struggled to provide consistent, reliable availability. Services dependent upon Block Explorer and BlockChain.info for transaction information were suffering during the month when those underlying service providers themselves underwent extended maintenance and experienced unplanned outages.
A little over 217,750 bitcoins were issued (or “generated”, or “mined”) during the month worth nearly $1.1 million using the average daily valuation of $5.12. For the miners paying typical electric rates the current mining profitability is covering the cost of electricity but otherwise little else, especially if considering the cost to amortize typical mining hardware as well. The difficulty did increase but only around 5% for the month. With commercial availability of FPGA designs, miners will be likely see another squeeze on margins unless the exchange rate jumps up.
With continued attention being given Bitcoin — the latest rush coming as the result of comments from Google’s Executive Chairman, the currency continues to gain mindshare.
Though speculative investment remains the primary attraction for many, the currency continues to be poked and prodded, measured and weighed. Yet more so than ever before, Bitcoin is not being found wanting.
March came in like a lion for Bitcoin but like the saying goes, it went out like a lamb — fortunately! When the hack attack at hosting service Linode occurred March 1st, Bitcoin yet again gained attention it very well could have just done without. In all, there were nearly a quarter million U.S. dollars worth of bitcoins stolen from multiple bitcoin businesses in that attack. The BTC/USD exchange rate did drop about 10% following the news.
There was exchange rate volatility for much of the month, with the exchange rate dipping to as low as $4.30 after coming down from a high of $5.45 a few days earlier.
For the month the closing price of $4.90 was just four cents above the previous month’s close, but up 3.8% above the opening level at the beginning of the quarter and year when it traded at $4.72.
The volume of trading was way down for the month — $8.6 million worth of trades at Mt. Gox, which for comparison purposes saw $19.6 million worth of trades in January and $14.4 million worth in February.
One of the most important metrics for measuring Bitcoin’s health, the number of transactions per day, did maintain a higher plateau than it has for any month since August, indicating that as a payment network Bitcoin is gaining traction.
During March there were two general availability releases of the “Satoshi” Bitcoin.org client, including the first version to include the long-awaited “P2SH” functionality which will allow one feature, among others, known as multisignature. Multisignature provides a way that enables better protectioin for bitcoins in wallets. This particular release was risky however as a bad implementation would cause a blockchain fork. That window of risk has since passed and all went as planned.
Other third party Bitcoin clients, including Electrum, Amory and MultiBit all saw new releases in March. Also released in March was mobile clients Bitcoin Spinner, Bitcoin Android and a new mobile-based wallet, My Wallet from Blockchain.info which is available now from Google Play though the iOS version is still being reviewed by Apple (albeit after being resubmitted after a previous rejectioin).
Miners took in the 233,450 bitcoins that were issued (also referred to as being “mined”) during the month. Using the average daily valuation of $4.90 (coincidentally the same number as the month-end closing price) the value of these bitcoins issued totals a little over $1.1 million. Mining profitability continued its downward trend. Difficulty increased 18% but the exchange rate held steady causing that 18% to equal a drop in revenue from the beginning of the month to the end for miners (assuming they made no change in hardware capacity over the month). Miners can assess some of the blame to FPGAs, which are sufficiently efficient to become a game changer for Bitcoin mining.
For every Linode type of story that takes Bitcoin down a notch there are multiple smaller instances of forward progress for Bitcoin. In March the financial and mobile tech industry has for the first time realized Bitcoin’s potential for use in Africa. For the African continent as a whole, those using mobile payment systems outnumber those who have bank accounts by several to one.
The massive amounts of investment in payment systems startups like Square, Venmo, Stripe, and others are starting to see results with product announcements and acquisitions. Having no venture capital backing, no marketing staff and no advertising budget, when Bitcoin reaches mainstream success it will have done so on its own merits — like by not needing a dongle (which Square requires). Or by being uniquely qualified for serving the unregulated cash-based economy.
What has changed in recent months is the tone towards Bitcoin from the financial and technical industries. Bitcoin is starting to get taken seriously. It gets discussed at industry conferences now. Bitcoin shows it is maturing when a journalist can ask former U.S. Treasury Secretary Larry Summers about Bitcoin and gets a positive response in return. There still is progress to be made though, like when a former Federal Reserve economist makes a dismissive claim about Bitcoin but that claim is then not further questioned by the cable news program’s host.
While the “killer app” many are expecting the Bitcoin ecosystem to produce has not yet arrived, what continues to happen month-after-month are many small successes. BitLotto, which uses the Bitcoin blockchain to make it the best alternative to state-run lotteries, sold more tickets this past month than in any month before. SpendBitcoins exchanges gift cards for Bitcoins and each month offers a wider selection of cards than the month before. Ogrr, which is building a gaming community with bitcoin as the currency used, has been growing faster than 50% each month recently. And GLBSE, which has been a testing ground for equity-based crowdfunding before Congress even knew what the term meant just launched a web-based release that will help it reach a broader client set (for use only by those in jurisdictions where such activity is allowed, of course).
Considering where Bitcoin was a year ago (in Spring of 2011 exchange rate volatility was positively insane, for example) or six months ago even (“Bitcoin was dead” according to the press) great strides have been made. Being resilient against negative developments like what was faced at the beginning of the month and being able to glide through the most risky update released in over a year-and-a-half might mean that bitcoin is getting closer to becoming a financial transaction network option suitable for a much wider range of use. And that’s not just idle speculation.
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.
Bitcoin Ends October Down Nearly 10%, Still Up 137% YTD 2012
For the month of October, 2012 the closing price of $11.20 USD was down more than a dollar from the previous month’s close resulting in a nearly 10% drop for the month. For 2012, where the price opened at a $4.72 level, the price rise from January 1st is now at the level of 137%.
It might not be surprising for there to be a down month after there was more than half a year of continuous month-to-month gains. What might be surprising is that the month ended down just 10% after the disaster that October 2012 essentially was for the Bitcoin ecosystem as a whole.
The choke point for the digital currency remains where it intersects with banks — the Bitcoin currency exchanges. October brought way more than one month’s share of disappointment from most every Bitcoin exchange.
Those in the UK were nearly desparate enough to call in a request for bitcoins to be airlifted in, as both BTC/GBP markets remained essentially idled throughout the month. These two BTC/GBP markets remain unusable following Intersango’s loss in August of their UK bank, Metro, and Mt. Gox’s loss in September of their UK bank, Barclays. Though some options like Blockchain.info/wallet’s new Pingit purchase method helped to prevent a complete logjam, these options are still considered suboptimal.
A promise of relief arrived with the announcement of Bitcoin-Central’s BTC/GBP market. Further relief arrived with Blockchain.info/wallet’s Instant Online Bank Transfer which is now available in the UK and elsewhere in the EU.
And seemingly out of nowhere came a new entrant, Bit2Brit — though vetting of the service by the community has just begun. [Update: They didn’t pass the community vetting process.]
There continues to be increasing demand for methods to purchase bitcoins using cash without having to provide identity. This was made easier in October when VirWoX began to accept UKash vouchers as a method for adding funds to a VirWoX exchange account. VirWoX also expanded the list of countries from which another cash voucher product, the PaySafeCard, could be used for adding funds.
A market that closed in October was Intersango’s BTC/USD market after the trading volume there remained too low for Intersango to be able to justify continuing the service.
Another BTC/USD market, BitFloor, had resumed trading following its massive September security breach, but in October the service lost its ability to provide cash-out via ACH (direct deposit) as well as its ability to accept cash deposits at two large national banks.
This alone was bad but compounding it was the sudden, unannounced halts that occurred simultaneously at several U.S. exchanges that provide service in the U.S. — BitInstant, FastCash4Bitcoins.com, Bitcoins Direct, and a relatively new exchange, BitMe.com. Those services have all since reopened after making modifications to their operations.
Emerging during the darkest part of the shutdown storm was Coinbase’s launch of its BTC/USD exchange. This allows a Coinbase user to make bitcoin purchases paid for with funds drawn from the user’s bank account. This transfer method is already familiar to PayPal users who have a linked bank account so Coinbase’s approach is already proven. Coinbase users can also sell their bitcoins and the proceeds of the sale are sent as a direct deposit (ACH) transfer.
Further assurance that Bitcoin would muddle through October’s problems was Paymium’s disclosure that it now has more than 20,000 active users for its services. Released in October was the redesign of Paymium’s Instawallet which at the same time became the first Bitcoin implementation in Apple’s Passbook. Paymium also operates the EWallet service Paytunia as well as the exchanges Bitcoin-Central.net and Instawire.
Banking issues were just one challenge for the exchanges as heavy distributed denial-of-service (DDoS) attacks took many exchanges down at one point or another during the month. A relatively new but quickly growing exchange, Bitcoin-24, had its wings clipped when a security breach in October resulted in the loss of funds.
While Bitcoin currency exchanges continue to paddle against the current, another form of exchange, a cyber-equities stock market known as GLBSE was scuttled by its captain.
Bitcoin critic Stanislav asserts that “Bitcoin users have been doing a thorough job of [discrediting Bitcoin] all by themselves”. With the embarrassing circus sideshows surrounding Bitcoinica, BS&T/pirateat40, GLBSE and numerous others one can hardly argue with Stanislav’s point.
While the bitcoin exchange rate might temporarily be impacted with the ebb and flow of multiple currents, these developments do not have much of a long-term negative impact for Bitcoin. Bitcoin is simply a protocol and it does not have a filter that would allow intervention to permit its use for some purposes but not for others. Bitcoin cannot discern between “good” and “bad” — just as it is with cash. People do stupid stuff and the world continues moving forward.
What Bitcoin brings to the world is a combined store of value and payment system that is based on math rather than regulation and trust in people for its survival. The Bitcoin protocol has the potential to be used to solve a wider range of problems but the current development focus is on resolving the immediate scalability issues that exist when running a full Bitcoin.org client node. Significant progress with this occurred in October when the ultraprune capability was merged into mainline — a prerequisite to it being included in a future release.
The 230,400 bitcoins issued which Bitcoin miners took in during the month is valued at $2.70 million using the average daily valuation for the month of $11.72. Miners fared less well in October as the result of a rising difficulty — 15% higher at the end of the month versus the level at the beginning as well as the decline in the exchange rate. The mining profitability computation normally changes solely due to the combined changes in difficulty and the exchange rate. Later this month, at block 210,000, the block reward mining subsidy drops by half. This halving of the amount of currency issued means miner’s revenues will drop in half as well. Many miners were speculating that the lowered issuance would result in a spike in the exchange rate — but since the halving is no surprise to investors, this event appears to already have been priced into today’s exchange rate.
It is generally agreed that the primary demand for bitcoins comes from those speculating that there will be a future increase in the exchange rate. But the herd-like mentality of speculators means that demand can disappear in an instant and a deep selloff can result. Twice during October were cliff dives of 15% or more. But Bitcoin is continuously expanding in breadth and depth — so the market’s reversal means that either it had previously gotten too far ahead of itself or that it might be using the wrong rear-facing indicators when evaluating which direction Bitcoin is headed going forward.
If Bitcoin were a corporation it would have certain target markets it would pursue while skipping over others less strategic to its success. Bitcoin isn’t a corporation and doesn’t have a marketing function that pursues certain types of business. So it is encouraging to see the many ways in which Bitcoin is gaining traction from the bottom up.
One such revelation occurred this past month showing the ways that Bitcoin is being used by online pharmacies to counter the Big Pharma racket. Bitcoin has been discovered by Forex exchanges as a method for customers to fund their accounts. While the major digital currency exchanges AurumXChange, WM-Center, and Lillion Transfer started providing bitcoin exchange long ago, smaller firms serving geographic niches are discovering Bitcoin as well, with so many more prospects as well.
That a student in Canada was able to obtain cash in hand just an hour after his Iranian mother purchased bitcoins thousands of miles away is an example of how Bitcoin meshes well regardless of the circumstances.
A significant indicator that Bitcoin has the potential to become much more widely used surfaced with the European Central Bank (ECB)’s policy brief on Virtual Currency Schemes. The 55-page brief describes Bitcoin as having the potential to have a negative impact on central banks. Paraphrasing a conclusion from a post by Erik Voorhees, this very well could be the ECB’s first steps towards regulating Bitcoin. If Bitcoin wasn’t gathering steam, why would they even bother?
What is quite clear is that Bitcoin is quite hard to define, measure, adjust, or react to even. A problem was identified where prepaid debit cards need not be declared as cash when crossing the border. Fifteen years passed before legislation finally addressed the issue but even the regulatory response is now being questioned. That’s for this well understood, locally issued “stored value” financial instrument used by a highly regulated industry in which financial regulators have absolute control.
Compare that to trying to regulate a peer-to-peer decentralized ledger system stored globally which functions thanks to messages signed cryptographically using a private key that may exist nowhere but in your mind.
In other words there is no way to know where Bitcoin will fit in the puzzle, or if it is even a puzzle piece at all.
The Bitcoin investor and entrepreneurial community is the 15,000 pound elephant that is unaware of the beautiful world that awaits if it would simply stop worrying about that little wooden peg of resistance and just keep moving forward.
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.