Believe in Bitcoin

The bitcoin message boards are again flooded with calls of “to the moon” from crypto-currency bulls as the price has climbed more than 30 percent over the last five days. The Coindesk Bitcoin Price Index is currently at $582.27 (and rising) after opening last Monday at $444.81. Yesterday’s closing price was the highest since March 26, erasing a medium-term downtrend. The last week’s price increase has added more than $1.8 billion in total systemic value, with all 12.8 million bitcoins in circulation now worth $7.46 billion.

The question, following a run-up like this is what’s driving the increased enthusiasm and how long will it last? As with any securities market, there are no sure answers, only speculation, but there are several theories of varying degrees of validity.

Many observers have pointed to the rapid decline in value of the XRP – following Ripple Labs co-founder Jed McCaleb’s decision to sell his XRP holdings – and similarly the steady but substantial decline in the Dogecoin price, suggesting the refugees of these markets are now flooding into bitcoin.

Others have pointed to predictions that SecondMarket founder Barry Silbert made in December, saying, “We’re three to six months away from Wall Street dollars moving into Bitcoin in a big way… Once Wall Street starts putting money into Bitcoin — we’re talking about hundreds of millions, billions of dollars moving in — it’s going to have a pretty dramatic effect on the price.” With that six month mark approaching, many are questioning whether either, Wall Street institutions are beginning to more money into the system – which seems unlikely given the modest size of the price increase – or whether industry insiders are buying bitcoin ahead of such a near-term influx.

Another theory is that the sustained period of neutral to positive news, and thus the absence of any negativity or scandal – such as Silk Road, Mt. Gox, and China – has allowed the bitcoin price to break out from its two-month-long hibernation between $400 and $450. While there was no single headline to which this spike can be attributed, rather the thinking goes that bitcoin bulls have sat on the sidelines long enough and any lingering uncertainty related to these previous negative events has fully faded away, allowing them to jump back in the market.

Also receiving credit for the upswing is the dramatic increases in merchant adoption across the first half of the year, leading to more utility value for bitcoin. As Coindesk writes, “At the beginning of 2014 there was [sic] an estimated 20,000 – 30,000 merchants that accepted bitcoins for payment. By the end of the first quarter, approximately 60,000 merchants accepted bitcoins.” This growth in bitcoin infrastructure is only beginning to translate into greater usage as a medium of exchange, but it foretells additional growth in this regard going forward.

Finally, there’s the notion that the bitcoin market moves in predictable cycles and was simply due for a rally. Six weeks ago, for example, Bitcoin Owl author Ivan Raszl laid out a case for a near-term run up in the bitcoin price, ultimately reaching $2500 in late summer. Pointing to the impact of growth in bitcoin services delivered by recently funded startups, he writes:

At each step after a relative calm period of about 6-8 month the price went up several fold drastically within 1-3 months and later dropped to about half of the peak and about double of the original calm period.

Raszl’s long-term price forecast would seem overoptimistic, however the market is trending upward as he predicted. Further, his overall sentiment about market cycles is one shared by plenty others. A Reddit user named oleganza shared the following chart (of unknown origin) noting the regular eight month cycles by which the bitcoin price has been fluctuating over the last four years:

Bitcoin 8-month cycles

Bitcoin Reporter, who takes a technical tradering approach to analyzing the bitcoin markets, writes:

As previously reported, once it became evident that the medium term down trend had been broken, heralding a new phase of the long term bull market, the shorts would cover and those on the sidelines would jump on board the next bull train causing an explosive movement, and this is what we are currently no doubt seeing…

The year to date chart is confirming that the market is now in the early stages of the next phase of the long term bull market. Whether the current steep rate of appreciation can be maintained remains to be seen, it is however to be expected that the bull phase will be steeper than the bear phase has been.

There’s no smoking gun to which this latest run-up in the bitcoin price can be attributed, but there’s no question that the bulls have the momentum at the moment. Given the relatively small size and limited liquidity of the bitcoin market, these rallies, like the downturns, tend to last for extended periods of time.

The last time bitcoin went on a run like this, it climbed more than tenfold over six months from $84 on July 1, 2013 to a high of $1,147 on December 4, before falling to $757 by the end of the year (and a low of $360 on April 10 at the depths of the Mt. Gox implosion and scandal).

If history repeats itself, we could be looking at a similar prolonged run which may test previous all-time highs. Then again, we could just as easily be seeing a confined event, traceable not to a broader bull trend, but to a single inflationary event (like a single big buyer temporarily pushing prices upward).

There is legitimate progress being made on both the infrastructure and regulatory fronts that give reason for optimism, but the size and speed of this latest run up in price would seem to outpace those more modest factors. The moral of this story is, bitcoin like all markets is irrational and thus nearly-impossible to predict. There are as many theories for why bitcoin will soon reach $2,000 as there are for why this latest price increase is merely a mirage and a $200 price point is just around the corner.

Those who bought into the market during its prolonged bottom around $440 look wise today. They could just as easily look like geniuses or fools tomorrow.

[Image via sofamax]