Analyzing Bitcoin’s Break Through $200

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Update, October 24: The bitcoin markets experienced a dramatic price correction over the past few hours. As our readers are aware, the latest drop was in line with historical expectations. We pointed out yesterday that “maintaining 0.3 or greater price velocity for two or more consecutive days has historically been met with a significant correction shortly thereafter.

With the price climbing ~13% in the day since we published the original piece before tumbling over the past few hours, the graph below speaks for itself:

10-24 updated velocity

Original Publication:

Nearly all market participants are aware of the dramatic increase in the bitcoin exchange rate over the last two weeks. USD/BTC has climbed roughly 50% compared with the relatively stable price before the drop on Silk Road news three weeks ago. While the bitcoin market is no stranger to volatility, recent activity remains an outlier in historical context, matched only by a few other occurrences in the past three years.

btc price

Win/Loss Ratio

To gain a sense of how the recent increase compares with previous periods of significant gains in bitcoin price, we looked at price velocity (speed and direction). To measure direction we looked at the 10-day win/loss ratio on a rolling basis since the beginning of 2011. For this measurement, any number above 1 indicates a greater number of daily gains to daily losses, and any number below 1 indicates daily losses are more frequent than daily gains. As the chart below shows, the ratio currently stands at 9 – a figure matched infrequently on a historical basis. Importantly, the previous times that level was initially reached indicated the relatively early stages of a more significant price climb, rather than the peak as one might expect.

win-loss

10 Day Moving Average (DMA)

The win/loss ratio gives us a measurement of price direction, but in order to observe velocity, that directional movement has to be compared with speed/magnitude. In this case the logical comparison metric is the 10DMA price change. As the chart below shows, at a current rate of 4%, the gains are certainly larger than normal, but still only at what would be considered the beginning stages of any historic major price climbs.

10dma price gain

Velocity

In combining direction and speed, a measurement of velocity can be derived. The resulting metric of magnitude in price movement shows a clearer picture of the latest gains in a historical context; most notably that a level of 0.3 on the resulting scale has only been reached preceding bitcoin’s largest bubbles. During the two largest bubbles, when this level was reached for the first time during the initial upward trend, it was followed by a period of relative price stability before more dramatic gains were made subsequently. Acknowledging that after-the-fact rationalizations have inherent bias, the trend shown would seem to make sense: a demographic picks up on bitcoin and drives initial price gains, with media and hype driving the next burst shortly thereafter as continually newer/weaker players enter the market. Also worth noting is that maintaining 0.3 or greater price velocity for two or more consecutive days has historically been met with a significant correction shortly thereafter.

velocity
Comparing consecutive days above 0.3V with linear price during historic bubbles:

velocity 2011velocity 2013

Macro Environment

Also worth noting are the qualitative comparisons between the latest gains and similar periods in the past. Catalyzing the bubble in March-April of this year was news that Cyprus would seize what ultimately turned out to be 47.5% of depositor funds from a number of the country’s largest banks. That haircut was a requirement placed on Cyprus by the ECB and IMF as a prerequisite for an aid package to prevent economic collapse in the country. In the IMF’s October 2013 Fiscal Monitor, the notion of a similar 10% ‘capital levy’ on more nations is proposed, leading to much discussion about the potential implications. If a wealth tax drove the previous bitcoin bubble, there’s reason to believe such proposals would have a similar effect more recently.

Not to be overlooked is the recent bitcoin interest out of China. In addition to CNY seeing 1.5x the trading volume of the USD markets over the past 24 hours, Chinese markets have also been the notable price leader and driving movement as we pointed out last week.

Finally, the deterioration of fiat value store has accelerated in the past weeks. As unemployment in the US ticked in at 7.2% yesterday with labor force participation at the lowest level in more than 30 years, the prospect of Fed tapering has all but disappeared from the majority market outlook. The result has been the continued climb to new highs in equities, while also sending the USD index (DXY) near two-year lows. As we’ve pointed out previously, bitcoin has shared a generally inverse relationship with USD for the past few quarters, with the latest movement from both currencies continuing to fit that pattern.

btc-usd

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About the author  ⁄ Jonathan Stacke

11 Comments

  • Reply
    October 23, 2013

    You mean BTC/USD !!!! Currency pairs are always quoted currency 1/in terms of currency 2. So BTC in terms of USD would be BTC/USD. When you said USD/BTC was up 50% I almost fainted!

  • Reply
    October 23, 2013

    I was doubtful at first about bitcoin..but now that china has jumped in all the way(a lot of traders in china) I think we will see 1000 in 12 month time.

    • Reply
      October 23, 2013

      You are pessimist.
      1.000 in 3 months is more probable.
      make 100 days from now.

  • Reply
    Leo
    October 23, 2013

    Thank you for your technical / statistical analysis. Your articles save time to those of us statistically inclined and bring an interesting, depassionated light to the XBT speculative endeavour. Keep up the good work!

  • Reply
    October 23, 2013

    Thanks for the excellent article. I get the feeling that BitCoin price is poised to very quickly grow exponentially and stabilize, as it’s done with every bubble bursting.

  • Reply
    Karl
    October 23, 2013

    Sorry, but I guess most of your readers dont know the first thing about TA. The metrics you draw up are creative at best and dangerous at worst! Almost metric you use is not part of traditional chart anylysis and completely experimental. The relationships you draw up have a very small sample size and could therefore be completely arbitrary. You should really point that out to your readers as part of your journalistic responsibility!

    A WARNING TO READERS: THE METRICS IN THIS ARTICLE ARE COMPLETELY UNTESTED AND SHOULD BE TAKEN WITH A BIG SPOON OF SCEPTICISM! DONT RELY ON NEWLY INVENTED INDICATORS JUST LIKE THAT!

    • Reply
      Frank
      October 23, 2013

      If you bild knowlege based on air of creating money out of nothing , and they make it a proffession called economics ,http://www.youtube.com/watch?v=htIbwvKt8cE iam not supprised they can not see the bitcoin comming , because logigcal thinking is the thing they can not.,

  • Reply
    Dawie
    October 23, 2013

    Here is to the end of the Fed!

  • Reply
    October 23, 2013

    Great article. Thanks.K.U.T.G.W.

  • Reply
    Tibolt
    October 24, 2013

    Well, looks like you nailed it. Really impressive stuff here.

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