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bitcoin consolidation

Solid BitCoin Consolidation Finally Bears A BitCoin Breakout

by Trace Mayer, J.D. on December 19, 2011 · 16 comments

Reading time: 6 – 9 minutes

Few assets are as volatile as BitCoins have been. Over the past 365 days they have ranged from about $0.05 to over $30. After a solid consolidation BitCoins have now broken out and the next upleg appears to have appeared with a 35% rise in the past 10 days.

BitCoin makes this payment efficiency possible because it is based on cryptographic protocol where its security is grounded in the laws of mathematics not laws of men which may or may not be enforced profitably.

THE BITCOIN RANGE

Back in June 2011 I wrote about how I supposedly missed the trade of the year where I could have “with a completely non-levered investment that would have turned [$5,000] into slightly over $550,000 in 8 months. $550,000 in a completely anonymous account with neither a paper or audit trail nor a 1099 and the asset would have been purchased with $5,000 of physical cash.”

Some say hindsight is 20/20, but I do not think so, because it still takes the gathering, analyzing and understanding of the data before one can get a picture and sense of what has happened. Before there were no data points to use in predicting the sustainability of the unsustainable BitCoin upleg. But this time around we can make slightly more grounded prognostications.

Filtering out the daily noise of the markets is essential if one is going to hone in on the signal. One of my favorite tools to accomplish this is the simple 200 day moving average. Taking into account almost seven months of data it is long enough to filter out daily noise, like the MF-Global or MyBitCoin fiascoes, but still close enough to capture the general trend of long-term secular markets, whether bullish or bearish. To derive a relative price I take the current price divided by the 200 day moving average.

In BitCoins case we now have a tremendous upleg and crash in the history books. An analysis of the data reveals the low end of the relative price is around 0.35x (cheap) while the high end was about 12x (expensive).

To create the organized cryptographic hash required energy which had value in the market.

BITCOINS PROVIDE UTILITY AND ARE VALUED

BitCoins are a decentralized peer to peer digital currency. They are the most efficient and safest form of currency I am aware of. Sure, they have neither the intrinsic value nor depth of volume like gold but they are still harmonious with the regression theorem. To create the organized cryptographic hash required energy which had value in the market just like gold had value in the market for jewelery before it acquired additional value from its utility from moneyness and currency applications.

For example, I was reading a blog which recommended the application Total Finder. Total Finder allows one to open multiple tabs in the Mac Finder which makes dragging, dropping or locating folders and files much easier. It is a feature that should be built into the OS but is not so a creative entrepreneur saw a market need and filled it.

I immediately recognized that this application would save me time and decided to purchase it. The price was $18 and it is available in the Apple store. Then I did a Google search for “Total Finder bitcoin” and found the author’s article Trade Total Finder for BitCoins. As expected there was a discount, 50%. Why is that?

Because the current payment systems are too expensive. Apple takes 30%, the credit cards and processors take 1-7% and require the identity of both the buyer and seller along with sales and income taxes which are much easier to enforce plus your accounts can be arbitrarily frozen like with the Wikileaks banking blockade. By removing all these middlemen moochers and looters from the transaction both parties are better off with a 50% discount in price.

BitCoin makes this payment efficiency possible because it is based on cryptographic protocol where its security is grounded in the laws of mathematics not laws of men which may or may not be enforced profitably.

I think everyone should hold some BitCoins, perhaps at least 0.1% of their net worth, in their portfolio.

BITCOIN VOLUME HAS INCREASED TREMENDOUSLY

The rise in BitCoin’s exchange rate has surprised me. First, BitCoins are currently being inflated at approximately 42% per year. That is quite the increase in the currency supply. Second, early adopters are sure to control tremendous amounts of BitCoins and I would think they would be divesting themselves as the market would bear without sinking the price too drastically and third the BitCoin economy is still in its infancy.

Over the last six months I have watched the average transactions in the public block explorer grow to about $1 million per day. The exchanges have increased their trading volume from about 40,000 coins per day to approximately 200,000 on 19 Dec 2011. With about 8 million BitCoins in circulation there is plenty of volume to provide a bid for any early adopters who decided to disgorge large amounts of coins.

BitCoin is an illusion like the FRN$, Euro or Yen. The market is deep enough that I would place it in the cash portion of your balance sheet. Additionally, if you take the proper steps it is the most portable currency ever. For that element of safety and liquidity therefore I think everyone should hold some BitCoins, perhaps at least 0.1% of their net worth, in their portfolio.

CONCLUSION

Watching this breakout and ensuing upleg in BitCoins is going to be exciting. Since the last rally in June there have been real life applications developed from mobile payments to massive online stores with hundreds of thousands of items, entrepreneurs have stepped in to accept BitCoins as payment, the client has been greatly improved, exchange security has been enhanced, with proper privacy hygiene your cryptographic hash is more secure than even a gold coin and more people understand what BitCoins are, how they work and why they want some.

Taking the current price of $4.00, the 200 day moving average of about $8.50 and extrapolating this upleg with a 12x 200dma top we could see a price of around $80.00 per BitCoin. Is this speculative? Yes. Would I bet on seeing $80 per BitCoin by around June or July? Maybe if the odds are around 5%. But I would take a bet for BitCoins to hit $7.50 by June or July at around a 50-70% probability.

So, if you want to buy any Run To Gold products using BitCoins just contact me and we can make a deal with a substantial discount. If you need a place to get any BitCoins then I recommend the Tradehill exchange.

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16 comments

ABOUT THE AUTHOR: Trace Mayer, J.D., author of The Great Credit Contraction holds a degree in Accounting, a law degree and studies the Austrian school of economics. He works as an entrepreneur, investor, journalist and monetary scientist. Follow him on Twitter. This is merely one article of 241 by .
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{ 9 comments… read them below or add one }

1 Anony Mouse December 20, 2011 at 3:01 am

With 7.91 million BTC issued at present and daily issuance occurring at the targeted 7,200 BTC per day, the currency is inflating presently at the annual rate of about 33%. That is lower than the rate about a year ago — when the 7,200 per day represented about a 50% pace. This currency inflation rate will slow with every block (targeted to occur every ten minutes), and a year from now that 7,200 per day will represent about a 25% rate — on an annual basis.

But then, at the point that 10.5 bitcoins are issued, the daily rate drops by half — to just 3,600 BTC per day. And the annual rate of currency inflation at that point takes in instant drop to just 12.5% then (3,600 * 365 / 10,500,000) and continues to slow gradually every block at the 3,600 per day pace for the next four years thereafter.

2 Trace Mayer, J.D. December 20, 2011 at 9:10 am

Thanks Mr. Anony Mouse for a more precise discussion on the BitCoin inflation rate.

3 Anthony December 20, 2011 at 9:15 am

Nice article Trace although I wanted to make a few minor observations. In regards to gold: If you subscribe to the Austrian School’s Subjective Theory of Value then you will conclude that there is no such thing as “intrinsic value”. Things are simply valued or they are not. Gold is valued or it is not. Only volitional, living organisms can value things. Inanimate objects cannot value.

In regards to the regression theorem: I believe you are misapplying it here. Yes, energy has exchange value. Bitcoin is not energy. It is an entirely new commodity created from energy. Bitcoin is valued because of its unique features and benefits, not because it came from energy. A succession of entrepreneurs took energy and created something entirely new and valuable. I address this in further detail here:

Bitcoin: A New Commodity Created To Serve Market Demand

4 Trace Mayer, J.D. December 20, 2011 at 9:39 am

Anthony, yes, the intrinsic value issue is a little thorny and my usage may not be exactly technically accurate within our current prison house of language but does convey the point I try to make to the vast majority of readers. I use it mainly to distinguish from fiat currencies and gold or silver’s use for something other than currency. After they begin taking a few steps down that road it is not very difficult to assimilate the technical Austrian definition.

As far as the application of the regression theorem I do not think it is as easy as that and may be beyond my expertise, and likely yours, because it strays into some complicated areas of quantum mechanics, the organization of energy and cryptography. I disagree with your assertion that BitCoin is not energy because BitCoins are not necessarily ‘something entirely new’ or unique but instead merely energy organized in a particular pattern.

Of course, this strays into more philosophical realms as what is the difference between an inanimate object and a volitional, living organism besides the complexity and organization of its energy pattern? A few steps down this path leads us to The Singularity as we are already all cyborgs.

5 Anthony December 20, 2011 at 10:23 am

Trace, good points. I love the cyborg video!

Anthony

6 Henry B. December 20, 2011 at 4:28 pm

Great article. Bitcoin is rising from the ashes and this will attract investors even more than the June bubble did. Bitcoin is not just a company that can go under when things are bad, it’s here to stay. It’s going to be an exciting 2012 for everyone involved with Bitcoin.

7 knarr December 20, 2011 at 7:34 pm

What is a bit coin and of what everyday use is it? Where does one find anything about it. It sounds like a fiat scheme to me.

8 Trace Mayer, J.D. December 20, 2011 at 11:27 pm

Henry, I agree. I think BitCoin is going to stay around. Also, BitCoin never crashed into the ashes. It rose from under a nickel to over $30 in less than a year. Speculative bubble yes but the price never dropped anywhere close to what it started at. Even at $2.00 that was still up 4,000% in a year. The chart really ought to be kept in perspective which is why I like the 200 day moving average. The more trading data we are able to compile the more accurate the analysis and understanding we can derive.

9 T-dog May 27, 2012 at 11:24 pm

It appears to be a private electronic fiat currency with no government involvement and a predictable rate of debasement.

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