Bitcoin: why some peace and quiet might be good
At the beginning of this year, when bitcoin‘s poor performance as an investment in 2014 looked set to get only worse – as BitStamp was rocked by hackers and bitcoin’s value sank back to a level not seen since before its meteoric rise in 2013 – many fans of the cryptocurrency remained confident.
Investors may have been cowed by a currency that managed to lose over 40% of its value – or around $135 – in just two weeks, but bitcoin’s backers remained resolute. The cryptocurrency’s usefulness was becoming clearer, they said, and problems with exchanges were not necessarily problems with the underlying technology.
A few weeks later, and there are fledgling signs that they may have a point.
The value of the currency reversed much of its losses in the days after bottoming out at $177, and spent the first half of February trading between $215-$255. That might not be anywhere near the $1000 levels of its overhyped heyday, but is above the significant $200 barrier. It also represents some much-needed positivity for bitcoin’s price, which has been all-too rare over the past few months.
Perhaps most importantly, a daily closing trading range of $40 represents a period of unusual tranquility when it comes to bitcoin’s volatility. The last half of January had a range of $72, and first half $136: so bitcoin volatility appears to be calming after the tumultuous start to the year.
Bitcoin’s calming volatility in 2015. Source.
That may explain why exchanges saw less trading even as bitcoin’s price rose. Traders have always been attracted to bitcoin volatility, and this performance was relatively quiet.
Recent growth has taken place over the backdrop of an alleged Ponzi scheme being uncovered in Hong Kong, but major news stories have failed to rock bitcoin after BitStamp recovered from its breach. Even the Hong Kong Ponzi scheme was quickly revealed to be far smaller than originally thought: the total amount taken was revised down from $387 million to $8.1 million as initial speculation died down.
Bitcoin’s recent performance, then, comes about as its prominence has faded slightly in the public eye. For a currency that has often been rocked by negative publicity that it can do little to control, this is not necessarily a bad thing.
Traders have often had a negative impact on bitcoin thanks to their overzealous amplification of any move it makes, and willingness to hold onto the cryptocurrency instead of spending it. If they – and journalists that are fanning the flames – are staying away then bitcoin’s outstanding issues can be addressed in peace.
It does also mean that the number of new notable merchants accepting bitcoin has slowed, though. After 2014 brought about a glut of major brands announcing new ways to spend bitcoin – Microsoft, PayPal and Overstock among them – that is yet to happen this year. For many, merchant acceptance is a key requirement for bitcoin to gain widespread acceptance. For them, no new names in two months is not disastrous, but is a situation that should be rectified fairly fast.
The other key factor in bitcoin’s rise in prominence is widespread understanding of its underlying technology, and it is here where the current lower volatility and calm is useful.
Encouraging more start-ups to turn to bitcoin as a means of taking payments and transferring money is a great way of increasing its use without the bureaucracy that comes with more established brands. Encouraging people to start using bitcoin’s blockchain technology in new, innovative ways is even better for teaching the world just how useful the ideas behind cryptocurrencies can be.
It may or may not become an established investment market to rival commodities, forex and shares trading, but bitcoin’s blockchain could offer a whole new way to trade those assets instantly without relying on a bank’s mechanisms. Taking the ideas further, some have postulated that the blockchain could provide the economy for a set of self-driving, self-owning cars that would relieve congestion and open transport up to all.
In the more immediate future, bitcoin is proving a useful alternative for the 2.5 billion people around the world without bank accounts. Where established payment systems are not yet in place, bitcoin could thrive.
No revolution, then; but a bit of stability would go a long way towards encouraging companies to use bitcoin in new ways. Judging by the ideas for bitcoin’s blockchain that have already been created in its short life, that could lead to some very neat developments indeed.
This information has been prepared by IG Markets Limited. The material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.
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