Can one Model the Volatility of Bitcoin
The Bank of Canada Modeled the Value of Virtual Currencies. When we take a looking on a Bitcoin Chart that goes back to September 2011, I find it hard to lay an Algorithm over it which can describe the interaction between Vendors on the one side accepting Bitcoin and Consumers willing to spend their Bitcoins. The Speculators and or Investors participating in buying Bitcoin for the Short and Long Term on the other hand are much easier to identify. The behavior regarding Confidence and Trust in Bitcoin and its Eco-System is dominated in the Chart and is expressed in painful Consolidation formations.
Chart 1: BitcoinWisdom. 3 Day Candle Stick Chart Bitsamp Exchange between 2011.08.18 – 2016.09.02 including 7,30,90,200 Day SMA, Volume, Stochastic and MACD.
The first peek on the far left of the Chart was preceded by several other spikes to the up side that can't be seen on this scale. Depicted in Point (1) early in April 2013 we can see exponential price gains in a very short time frame that had to be worked off through back filling. Stochastic was evidently in an over bought range for quite some time had to com back down in order to generate a new Buy signal. During this early frenzy the Media was becoming quite aware of Bitcoin and was reporting on the ins and outs of the Decentralized Peer-to-Peer Crypto Currency. Many Readers immediately understood the many positive benefits of this new Technology and were willing to divest into Bitcoins from other Classical Asset Classes to profit from the future benefits that should become apparent to the masses. The Silk-road scandal was being worked through prior to the Break-Out to $1100 and more per Bitcoin. End of November 2013 Bitcoin was showing exhaustion after Market Capitalization of Bitcoin went from approx. $1.5 Billion to almost $12.0 Billion Dollars. At the time, first rumors were already being handed around that there was a problem with the Mt. Gox. Exchange. Smart Money was taking profit not just because of the rumors but also because of Chart Technical reasons. Stochastic and MACD were showing extreme over bought readings. The Investment community initiated a 65% Fibonacci Retracement move. Bitcoin went through three controlled consolidation cycles as seen by the Stochastic I,II and III. During the first retest of the Highs, it became apparent that Mt. Gox had to closed down its Website. MACD Bottomed out between mid Apr. 2014 and mid May 2014 and prepared the way for a buy signal. Bitcoin was able to gain in value till June and ended into July with a aborted Bull Market Trap.
If it wasn't for Mt. Gox's collapse, Bitcoin most likely would of ended its consolidation phase and continued its long term rally acting like a pressure relieve value for Fiat Currencies around the World. Confidence in Bitcoin Exchanges was up in the air. Could one trust the other Exchanges or were they also plagued with the same problems that were being reported from Mt. Gox. Bitcoin as a legitimate currency was generally not being questioned among the Crypto-Community. The Sell-Off would have to continue until things settled down. Two things were necessary to regain Trust in the future. First of all, no more incidences and second, good News was needed to lift the Market and install a renewed trust in the rest of the Bitcoin Eco-System. In this case, the consolidation of Bitcoin would have to continue back down and test the Break-Out-Level of Oct. 2013 again. This is were Long-Term-Investors would come back in and support Bitcoin. How do you Model such a Stress-Test in a young Currency?
2015 was a very good year for the Blockchain. Ethereum was well on its way. The possibilities of Smart Contracts was irresistible. Venture Capital was flowing abundantly into the sector. One needed although, serious discussion concerning the way forward with the problem of Bitcoin Scaling.
Chart 2: From Blockchain Info
Daily Transactions increased from 100 000 to 200 00 per Day during the year of 2015. Doubling the pace in one year. This is a very important indicator that Bitcoin is well on its way to becoming a major influential force to be taken seriously by Government and Industry and that it is not just used as an Investment Vehicle by Speculators.
A Classical Buy signal apeared as the 30 and 90 Day SMA flat-end out, the MACD was waiting at the Zero line for a Bullish Signal and then Bitcoin shoots up over the $250 level pulling the 7 Day SMA above the other two moving average singularity mid Oct. 2015. A nice Break-Out, Bitcoin is back, new and improved so it seems. There was a positive over all momentum. Notice the confirmation of the improved Volume situation tacking place during the Rally. Large yellow circle Nr. 8. The over shoot of Bitcoin to the north came to a halt on July 4th 2015 and went directly over to a back fill dominated sideways movement for the coming months.
The next leg up was some what suspicious. Starting 2016.05.26 to June 16th 2016. Bitcoin jumped from $450 to $780 in 5 ½ weeks, that is a 73% increase. What was the reason for the sudden unconfirmed by the Volume-Indicator Rally. Small yellow Circle Nr. 9 Chart 1. If one looks around in the world the last few years, we can notice that we are in the middle of a Fiat-Currency-War. The Central Banks are manipulating their currency with QE, Quantitative-Easing. Simply said, printing Money out of thin air and lowering Interest-Rates to near Zero or even into Negative Territory. Its a race to the bottom. Who can devalue their Currency the fastest. Which Country has the most to loose in this Development, the Chinese. They have Capital Controls. If your a private person and your currency is debased for what ever reason you have one simply way of bringing your Money in safety and that is to buying Bitcoin and or Gold which the Government supports. The other Asset Classes are in bubble territory. The one drawback with Gold is that I have a hard time buying a loaf of Bread, a Bus or Train ticket with it.
Chart 3: fxstreet.com Notice the second debasement of the Yuan in July starting heir in May.
In China they have huge problems, starting with real Estate bubble, over production of Steel, Air, Water Pollution, they had a Stock market Crash that took place over 9 months from June 2015 to March 2016 and ended with a loss of 50%, that hurts. Bitcoin is not just for Venezuelians (over 400% inflation and heading upward fast) a store of wealth but for the people of China also. The Yuan is loosing its purchasing power since Jan. 2014 steadily. Trying to Model the Value of Crypto Currency like Bitcoin becomes very difficult because it is linked to the World Economy and World Politics. Bitcoin can not be linked to a single Nations Economy. The usage of Bitcoin as a way to buy products seems almost secondary in a World where the most important question is not how much yield do I get on my Money, but rather the preservation of my Money.
Modeling Bitcoin in an isolated System would be much simpler. As the Transaction Volume per Day with Bitcoin increases, the price of Bitcoin climbs proportionally with it. In the present situation for every $100 that Bitcoin moves up in price, the Market Capitalization increase approximately $1.0 Billion.
Volatility of Bitcoin is more correlated to the safety and security features of the diverse Bitcoin Eco-Systems and how Hackers take advantage of Software Short falls. We know the Software is not perfect. One just can take a look at Operating Systems for our daily devices, Browsers, Satellite Systems and so forth. The more complex Software becomes, the more code has to be written that can act flexible to unforeseen situations. Weather Bitcoin Exchanges like in the case of Mt. Gox or more recently the Hack of Bitfinex in Hong Kong or Bitcoin Wallets all the way to Bitcoin ATM's and not to mention the DAO Hack which affected the price of Ether to drop 52% and then again a delicate drop during the Hong Kong Hack Software is incomplete and is the cause of most of the Volatility of Digital Currencies.
Ether is on the verge of making another come back even throw it not only has to fight against faulty Smart Contracts Hacks (its first Waterloo), or sensitive Bitcoin Hacks, but it also has to work out the Hark Fork that was forced open it out of the perspective view of Ether as an entity in this case, and not out of that of the DAO community that came to the conclusion to go this route. Ether Classic (ETC) will in the long riun most likely play a secondary roll in Cryptos and Ether (ETH) will play the dominate part in this particular area that deals with Smart Contracts. All in All, Bitcoin, Ether and a few other digitals that belong to the Top 10 synthetic currencies including Steem go through Volatile Times in early stages of their being do to Infrastructure queries on the Software Level until all the unwanted consequences are minimized. Speculation or Consumer behavior have less effect on the price of Bitcoin, they are responsible for regressions on the order of 5-10% and not 20-50% do to security questions. People active in alternative Money forms like Bitcoin etc. are strong believers in the Technology.
Like in the Fiat Currency World, The Cryptos have become an Asset Class of themselves. Hedge Funds are Active in this space and providing Liquidity in over sold situations. In the Fiat free floating currency system the U.S. Dollar would normally act as an Indicator how well a specific currency is doing in comparison to the Dollar. The USD as a Reserve currency was Gold Backed prior to August 1971. As of 1971, Interest Rates payed a Major roll in determining between Strong and Weak Currencies. Strong Currency – Low Interest Rate and vise-versa Weak Currency – High Interest Rates.
Since the Banks have bin find Billions of Dollars for manipulating Interest Rate we know that they are not useful as reliable Indicators. Interest Rates are also manipulated through Central Banks. They use tools called (QE) Quantitative Easing or simply said Counterfeit Money. It has the effect that Interest Rates are directed or managed artificially lower. This has the effect that the false signal of Low Interest Rate which normally suggests a Strong Currency is reversed. Now we have Weak Currencies when Low or Negative Rates are installed instead of being set by the open Market place. This is the reason why ¼ of all Government Yields in the World show negative Rates. Do to this fact that Rates are falsely low, Gold is forced into a comes back. It becomes the ultimate tool that can bring back order in the Financial World. Gold is again an indicator just like in the last 5000 years to show the health of International Currency, while defacto the U.S. Dollar is not capable anymore with conviction of taking on this roll like it did since 1971. The FEDs Balance Sheet expanded from $1.0 Trillion to $4.5 Trillion between the years 2008 and 2014 so they could manage Interest Rates and there for devalue the Dollar. But wait, we still have a problem. Gold could take over the roll of a true indicator to mirror currency value and according to some calculations price would have to be around $2500 inflation adjusted and depending how one calculates inflation up to $5000 per ounce or 31.1 grams. Normally Gold would levitate to this Level to reflect Economic and Government Dept Problems. But Gold is also being manipulated. Banks like Deutsche Bank in Germany have received fines for doing so and others are involved also not to mention Central Banks. But can you fine Central Banks for doing so when they have legal mandate from Congress to provide a stable currency and low unemployment numbers. If continued manipulation doesn’t stop or is just tempered a bit, then Bitcoin and Co. will become huge beneficiaries of these policies. Bitcoin come a Limited Edition form. Not more the 21 000 000 of them in total some time in the near future. As long as Gold is also managed, Fiat Money will bleed into digital currencies. With this constant bleeding into the Bitcoin realm and the strong support of convinced users, the price of Bitcoin will substantially rise as long as Security and Scalability Questions are solved.
Pull Backs seem to be Buying opportunities as long as those in responsibility, Politicians and Central Bankers make unwise decisions. Wall Street is extremely frustrated with the situation and fears a systemic event. There seems to be a fight going on between the Investment community that realizes this can not go on for ever and Central Banks that keep on feeding the addicted return on yield crowd. Wall Street is trying to force the FED on the right way again, but even if they succeed in doing so, it will be a very painful path to go down for everyone, especially for those who already have a hard time making ends meat.
Bitcoin will steadily show its positive properties. I can envision Bitcoin taking on the roll of the Reserve Crypto Currency. Why Reserve, because inevitably Bitcoin is Deflationary do to the 21 Million restriction emission. Altcoins will become necessary to balance things out. There is still the possibility that Bitcoin can pull back a bit maybe to the $500 Level if it decides to wait until the Elections in United State take place in November, or it could take off any Day now. We'll see. While I'm writing this all down on a Saturday Evening Bitcoin has broken out to the upside from $572 to $598 targeting the $618 level on the 12 hour resolution. Approximately $1.0 Million of bitcoin were bought in 15 minutes. Its targeting the $630 on the Daily candle sticks. On the 3-day charts, the stochastic is far from over bought and the MACD will soon pull into positive territory. On the weekly chart, I see some head winds at this Level. Time will tell.
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