Bitcoin News

Bitcoin Within Striking Distance Of 2016 Peak Price

Steven Gleiser - November 3, 2016

Bitcoin Rises To $730

The price of bitcoin is on the rise yet again. There are many theories out there attempting to explain why prices are on the rise. Most analysts say that bitcoin prices are rising because the price of the Chinese Yuan has declined. Yet there are many other theories and countless other variables that could be pushing bitcoin prices higher. The nature of this latest surge and the context within which it is taking place, serve to highlight the validity of variables that few analysts are talking about.

Previous 2016 Bitcoin Price Peak

Bitcoin peaked at $762 USD this year. That was on June 16th, a full week before the surprising Brexit vote and around 20 days before the much expected reward halving. The upward trend started around May 2015, when the price of bitcoin started rising steadily. Taking the halving into account, bitcoin price trends during the end of June are consistent with an economic phenomenon called currency overshoot. The price peaked well before the halving and then came down.

One Year Bitcoin Chart 2016
Bitcoin prices over the last year. Bitcoin peaked before the halving and then fell. After the Bitfinex hack, the trend is largely positive. Screen shot courtesy of blockchain.info

When bitcoin was overshooting, most polls were showing that Brexiters had a low probability to win the election. The halving was the only certain variable. Furthermore, anyone would have been able to calculate that the halving would take place in July. These trends suggest that people were buying more coins as the halving neared, and as buying slowed down, the Brexit surprise hit the market. The trends partially support the argument for a subsequent rise after Brexit results upended conventional wisdom. A closer look at the behavior of bitcoin and the British Pound shows that peaks and troughs in the value of both before and after the Brexit vote, don’t always coincide. This shows the limits of the correlation between the price of bitcoin and the results from the British referendum.

GBP USD 1 Year Graph
This one year GBP USD graph shows the effect of Brexit on the Pound. The correlation between the price of the pound and bitcoin after Brexit is not as strong. Screen shot of the GBP USD graph courtesy of Bloomberg.com.

Bitcoin Racing Towards its 2016 Peak Again as the Chinese Yuan Depreciates

In the meantime, the Chinese Yuan was weakening steadily against the US Dollar. Yuan weakening price trends match those of bitcoin strengthening against the USD to a certain extent, in the months leading up to bitcoin’s overshoot. Nevertheless, bitcoin prices started decreasing as the Yuan’s devaluation accelerated. This also limits the correlation between the behavior of bitcoin and Yuan prices, except that now as bitcoin prices rise, the Yuan is following a renewed path of steady depreciation. This is probably the correlation that analysts refer to when they assert that bitcoin prices have more to do with the economic situation in China than anything else.

1 Year USD CNY Graph
The Yuan has also depreciated throughout the last year. Nevertheless the correlation between the depreciation of the currency and bitcoin appreciation is not strong enough to establish a causal relationship. Peaks and troughs on this chart and the USD BTC chart don’t always match. Screen shot of the USD CNY graph courtesy of Bloomberg.com.

Political Factors

Given the fact that one of the most controversial US elections is coming up, analysts must look at the Yuan and Brexit variables within a wider context. The US Dollar is strengthening against almost all other major currencies, and that is due to the US election but also because the Fed is likely to raise interest rates before the end of the year. Taking that into account, it is natural for the Yuan and the Pound to depreciate due to exogenous factors. That does not necessarily mean that investors in China or those who are exposed to Brexit, will flock to bitcoin as a safe haven. Analysts could well expect a non-interest bearing asset such as bitcoin to depreciate as interest rates are set to rise, making a hedge on a non-interest bearing asset less likely. This however, does not seem to be the case.

Since the economic fundamentals of bitcoin are not changing – the halving has already happened so supply is not expected to shrink further – analysts can also look at Bitcoin politics in order to put the situation within context. In terms of Bitcoin politics, there is more positive sentiment within the community about the possibility of increasing block size and solving – at least temporarily – the transaction time and volume issues.

Political Arguments are hard to Measure

Although there is a lot of uncertainty regarding the political situation in the US on one hand and on the other hand Bitcoin politics seem to be showing positive signs, the effects of both on the price of bitcoin are hard to measure. In terms of the former, analysts could use polls coupled with some conventional wisdom about expected economic policies in either a Clinton or a Trump administration. This could lead analysts to believe that since Trump seems to constitute a threat to economic world order, bitcoin appreciation should correlate positively with the Republican candidate’s rise in the polls. However, that would be purely speculative. Neither candidate has the power to disrupt world economic order immediately upon being elected. It would take years to back down from free trade agreements – Brexit is a clear example.

In terms of the latter, the implementation of SegWit may well boost bitcoin price in the short term. Despite positive sentiment within the Bitcoin community, SegWit implementation is still far away in the horizon. This means that Bitcoin politics may also be a factor albeit not necessarily strong enough to affect the fundamentals of bitcoin price just yet. Bitcoin prices display a steady and constant rise since August, which proves that speculation due to the political situation may only have a marginal effect on bitcoin prices right now.

Bitcoin Hacks and Security Related Issues

That leaves analysts with a far more complex picture. Bitcoin prices depend on many more variables than just the price of the Yuan, Brexit and politics. In fact, the single most influential variable affecting the price of bitcoin in the last few months, was the Bitfinex hack. As soon as information about the Bitfinex hack hit the markets, the price of bitcoin plummeted to a low of $515 USD. That happened 3 days before Bitfinex officially admitted that the hack occurred. Ever since there is an upward trend in the price of bitcoin, indicating that markets may have over-reacted to the hack, or that the initial oversupply from the hackers trying to sell their coins disappeared quickly.

Bitcoin Price Recovery

The fact that bitcoin is just shy of its 2016 high might be due more to the recovery from the Bitfinex attack than anything else. Analysts could take a look at the fundamentals – supply, demand, risk of holding bitcoin and substitutes – and make a better sense of what is driving prices right now. After the currency overshoot, the halving and the possible effects of the hack on the supply side subsided, prices are more sensitive to demand, the risk of holding bitcoin and the situation of bitcoin’s potential substitutes.

The situation in China, Britain and the possible fallout from the elections may have an effect on demand for bitcoin, but the correlation is not as strong as many would think. There are other assets that investors and speculators buy to hedge risks, like gold perhaps. But the price of gold has been falling as the price of bitcoin recovers. It is true that in China there are restrictions pertaining to the assets people can buy; gold is not one of the restricted assets. In fact, Bloomberg reported in February 2016 that Chinese investors were buying more gold. It would be difficult to believe that these investors shifted their hedging heavily towards bitcoin in the last few months.

Substitutes

Bitcoin substitutes are the final piece in the analysis puzzle. In that regard, it seems that bitcoin advanced at the same time that Ether and Classic Ether retreated. Both of these alternatives to bitcoin – which some may argue are not really an alternative, but for the sake of the analysis could be taken as a close enough substitute – were under attack and their prices plummeted as the price of bitcoin recovered. The extent to which Ether and Classic Ether price weakness affects the price of bitcoin is unknown. Analysts have observed this inverse correlation between these assets before, so it cannot be ruled out.

Final Thoughts

All this shows that it is not quite possible to assess precisely which variables are driving bitcoin prices higher. It is clear that the ‘Chinese demand’ argument associated with any bitcoin price change, is somewhat overrated given the evidence. On the other hand, the ‘Bitfinex recovery’ argument seems stronger than many would think, although it has been largely overlooked. In any case analysts will keep on looking for reasons why bitcoin prices are moving upward and it will be up to the readers to decide who to believe.

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