Bitcoin Banker

Bitcoins, the most well known of a hand-full of “virtual” currencies are, according to Bloomberg, “decentralised, math-based digital assets in which transactions can be performed cryptographically without the need for a central issuing authority,” going on to state that,” the first specification and proof of Bitcoin, the first widely used virtual currency, was published in 2009, based on a paper under the pseudonym of Satoshi Nakamoto.”

The excellent book, “Bitcoin: The Future of Money?” by financial journalist and comedian, Dominic Frisby, supported by yours truly and many others by way of a modest contribution via the equally excellent publishers, unbound, observes, “On Saturday January 3rd 2009, the day UK Chancellor Alastair Darling announces his second bailout of the banks, the first 50 bitcoins are created, or to use the correct terminology, mined,” with an equally keen comment, “what has been born is a new form of money – money that could change the world.”

Just how profound the changes will be determined by the future, but Dominic’s book has certainly stirred up my interest in virtual-currencies, particularly at a time when the world is witnessing a “race to the bottom,” in respect of fiat-paper debasement whilst their major alternative, Gold, is also under pressure.

 An added incentive to analyse bitcoin further is the Financial Times 2015 predictions list, a contrarian’s bible on what not to do in matters financial, which suggests, “the chances of bitcoin, the most popular of this new breed of self-clearing financial instruments, making it as a mainstream currency are now zero,” and, “it is not a question of if but when the public loses interest in this experiment entirely.”

 As always, we look at the charts:

6 Jan 15 Blog 1

First up is a chart comparing $Gold against the Dollar index, with the latter inverted to better show the negative-correlation between the two, over-laying the relatively short historic price of Bitcoin. It is interesting to note that, aside of bitcoin’s price peaking in line with Gold’s peak price and the Dollar’s low, albeit some two years later, it was negatively correlated with gold until its peak of November 2013, since when it has closely followed the “fortunes,” or otherwise of the $gold price.

 Moving on to bitcoin itself, we can make further observations:

6 Jan 15 Blog 2

After the parabolic surge of 2013, when the price rocketed by 8500%, the two momentum indicators shown below the main body of the chart, being the “rate of change” and a “stochastics” measure, were crying-out “sell,” since when the price has corrected by a typical Fibonacci 76.4%, having initially finding support at the 50% and 61.8% lines, which is the norm.

Price has also fallen below both of the moving-averages shown, the 50-day and the 200-day, plus the 50 has crossed below the 200, known to chartists as a “death cross,” which will now offer stiff resistance to any rally attempt.

That said, there are the beginnings of a “bullish divergence,” where the two momentum indicators are rising whilst the price is falling, which alerts us to a possible trend change in hand. Furthermore, as both contrarians and students of Socionomics, we are attracted to the bearish thoughts of the FT columnist above, together with Barron’s magazine year-end comment, which highlighted last year’s price collapse of bitcoin and suggesting that merchants are running ahead of consumers.

Bottom line: Whilst we prefer to wait for the price to rise above the two moving averages, thus witnessing a “golden cross,” our own prediction for 2015 and beyond, is that bitcoin will perform exceptionally well as that biggest bubble of all, Government, deflates due to market forces, and the mis-trust in the Central Banks’ grows.

The Bitcoin 64m question, however, is to how it fairs during a de-flationary storm, as judged by the first chart, it is acting the same as a commodity, including gold.

Either way, as a longer term alternative store of value without borders, Bitcoin, looks to be a banker.

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