Bitcoin Appreciates Again

Bitcoin is creeping into the mainstream press. Last week, the digital currency was in the center of an article  in the Economist. In the article, we read:

Markets frequently froth and bubble, but the boom in bitcoin, a digital currency, is extraordinary. Although its price is down from an all-time high of $2,420 on May 24th, it has more than doubled in just two months. Anyone clever or lucky enough to have bought $1,000 of bitcoins in July 2010, when the price stood at $0.05, would now have a stash worth $46m. Other cryptocurrencies have soared, too, giving them a collective market value of about $80bn.

Ascents this steep are rarely sustainable. More often than not, the word “bitcoin” now comes attached to the word “bubble”. But the question of what has driven up the price is important. Is this just a speculative mania, or is it evidence that bitcoin is taking on a more substantial role as a medium of exchange or a store of value? Put another way, is bitcoin like a tulip, gold or the dollar—or is it something else entirely?

The article itself is rather balanced and stops short of calling Bitcoin an outright bubble. At the same time, it highlights the well-known features of the Bitcoin ecosystem. We also see a quite important mention of the drawbacks and bottlenecks of Bitcoin. At present, in the time of extremely elevated price levels, Bitcoin is running at full capacity with long transaction times and relatively high fees. This all might not matter for the next big move, though as the whole market seems wired on emotions.

More appreciation

For now, let’s focus on the charts.

On BitStamp, we have seen a slow ascent from around $1,900 to over $2,500. In our previous comments, we wrote:

The move up really was to strong for such a limited period of time and a correction was long overdue. We actually saw one but the extent of the depreciation has been relatively weak, at least compared with previous important tops. At the moment of writing these words (...), Bitcoin is above $2,200 and even though this might seems like a long way from the top at over $2,750, it actually is well withing the magnitude of a move we might expect after a period of significant appreciation. In reality, the move down is not really strong in terms of price or volume. Quite importantly, Bitcoin is already above the 38.2% Fibonacci retracement level based on the whole recent rally to the all-time high.

This is very much up to date. If anything, the very recent moves have been mostly to the upside and the volume hasn’t been meek. So, even though the situation hasn’t really changed that much in terms of price, the fact that we’ve seen consistent closes above the 38.2% retracement level. This means that the situation has become less bearish than it was a couple of days ago. This doesn’t mean that we necessarily have to see a move up, however, it makes a bet on lower prices riskier, in our opinion.

The picture now is not that different to what we saw previously. We saw a move up, but it hasn’t been very strong. The most important part is that the resistance at the 38.2% Fibonacci retracement is intact but also the all-time high is still not in play. This means that there hasn’t really been any change as far as the short-term outlook is concerned.

Additional factor to consider

On the long-term BTC-e chart, we see that Bitcoin is slowly creeping up to the all-time high. Recall what we previously wrote:

The depreciation hasn’t materialized so far and we haven’t even seen a slight move below the retracement. Actually, Bitcoin went above the 23.6% retracement based on the rally to the all-time high. Our reading of the current situation isn’t bullish, though. Why? Because it wouldn’t really take much to reverse the situation completely. Actually, if Bitcoin goes down $300 (not much when you take the recent moves into account), we might have a very bearish reading of the market. (...)

The situation now is less bearish than it was a couple of days ago, but it’s still in neutral territory. It would still take a move above the all-time high, and a confirmed one at that. So far we haven’t seen one. There’s one more factor to look at now and it’s volume. The readings we’re seeing now are relatively weak for a sustained move up which makes the appreciation suspicious. At the moment, we are still inclined to view the current move up as a test of the all-time high. Stay tuned.