Canada the world's 2nd-largest Bitcoin market

According to reporting by the Huffington Post, Canada is home to a vibrant and growing Bitcoin market.  Complete story here.

Bitcoin turnaround gains traction

As we talked about in the previously blog posting on April 17, Bitcoin has established an interim bottom and is on its way to a test of its psychologically important 200-day moving average.  In the weeks since this post was written, the Bitcoin price has silently rallied some 125 basis points to a recent high of 581.50 and is just under its 200-day MA.

The key to Bitcoin’s latest turnaround has been the much-needed lack of media scrutiny the virtual currency needed to build a base and eliminate investor fear from the crash earlier this year.  For much of 2014, barely a day went by without some major news outlet publishing a Bitcoin story and bringing unneeded attention to the platform’s woes.  Now that the media have grown bored with Bitcoin and have moved on to juicier stories, the recovery process can continue.

Let’s continue to watch for resistance around the 200-day MA intersection at about the 640-650 area (see above chart).  This would be the most logical pullback point for Bitcoin’s latest rally. 

Finally, an immediate-term bottom for Bitcoin

For the first time in nearly four months, Bitcoin has confirmed an immediate-term bottom. 

By closing two days higher in succession above its 15-day moving average on April 15, Bitcoin (basis BitStamp) has confirmed an immediate-term bottom per the rules of our technical trading discipline. 

As difficult as it is to fathom, this marks the only time in the year to date that Bitcoin has managed to close two days higher above the dominant immediate-term trend line.  The weakness in the virtual currency’s price has been persistent, and only now that a substantial number of “weak hands” have been washed out of the market will Bitcoin be able to establish an interim bottom.

Now that Bitcoin has been able to decisively break out above its 15-day trend line, we’ll need to watch for the final establishment of the low from earlier this month.  The inevitable pullback should ideally close above the pivotal low at the 360 level.  This would form a higher low and would give allow Bitcoin to establish a stronger base from which to launch a meaningful technical rally. 

Incidentally, the nearest overhead resistance benchmark for Bitcoin is the 575-600 area where the 200-day moving average intersects in the daily chart (see above).

Investors to Mt. Gox: A bitcoin for your troubles

According to The Wall Street Journal, a group of investors has offered to purchase bankrupt bitcoin exchange Mt. Gox for a token payment of one bitcoin, or about $400.

The group justified the near-zero price citing an “information vacuum” over Mt. Gox’s missing bitcoins that made it hard to place a value on the lost digital currency, as reported by Reuters.  Mt. Gox was formerly the largest bitcoin exchange but fell from its lofty position in February after filing for bankruptcy.  Mt. Gox contention is that hackers stole some 750,000 bitcoins belonging to its customers along with 100,000 of its own bitcoins after exploiting a security flaw in its software.

The investor group trying to purchase the crestfallen Mt. Gox includes Brock Pierce, a former child actor-turned entrepreneur, and venture capitalists William Quigley and Matthew Roszak.  According to Reuters, “The group hopes to revive the exchange and set aside 50 percent of its transaction fees to pay back burned customers and other creditors over time.” 

The acquisition must be approved by a Japanese bankruptcy court before being finalized.  The near-zero valuation of the proposed deal, however, is expected to provide a significant barrio to the deal’s consummation.  

Survey: Americans still don’t trust Bitcoin

Nearly half of American adults know what Bitcoin is, but few of them trust it enough to invest in it over gold.  That’s the finding of a recent survey conducted online within the United States by Harris Interactive on behalf of financial platform Yodlee. 

The survey, which polled 2,039 adults ages 18 and older, suggests Americans are still uncertain of its reliability and usefulness as a mainstream currency.  The survey found that while nearly half (48 percent) of American adults know what Bitcoin is, trust in the currency among that group is very low.  Only 13 percent said they would choose it as an investment over gold.

Increased knowledge of Bitcoin can correspond to reduced trust in it, the survey found.  People from America’s Western states are more likely to know about Bitcoin than people from the South or Midwest (55 percent, compared to 46 percent in the South and 41 percent in the Midwest).  Only 7 percent of Westerners who know what Bitcoin is, however, would choose to invest in Bitcoin over gold – the lowest percentage of any region.

“The financial industry benefits greatly from disruptive technology, but security is unfortunately a bigger challenge than some new financial innovators expect.” said Tim O’Brien, Yodlee’s senior vice president of operations and information security.  “Bitcoin has addressed some major opportunities in the financial system, but the vulnerability of some Bitcoin exchanges, along with the currency’s overall volatility, are still serious issues.  Bitcoin will be hard for consumers to understand and trust on a large scale until secure, user-friendly tools and services emerge to make it as convenient and safe as possible to use.”

Young adults tend to be the biggest Bitcoin supporters.  Twenty percent of Americans aged 18-34 who know what Bitcoin is said they would choose to invest in Bitcoin over gold – making this group over twice as likely as those age 55+ (8%) to do the same.  Young adults aged 18-34 who know what Bitcoin is are also far more supportive of Bitcoin’s libertarian values: 39 percent were not in favor of any government being able to regulate Bitcoin, compared to, 28 percent aged 45-54 and 24 percent aged 55 and older.

Americans’ attitudes about Bitcoin regulation are equally confused. When asked if any government should be allowed to regulate Bitcoin, nearly half (45 percent) of Americans who knew about the cryptocurrency said they were unsure.  Of those with a firm opinion, 44 percent said a government should be allowed to regulate it and 56 percent said no government should be able to do this.

The survey also revealed a strong male bias in terms of Bitcoin awareness. When asked if they knew what Bitcoin is, only 35 percent of women across the country said yes, compared to 63 percent of men. Only 14 percent of men and 10 percent of women preferred Bitcoin as an investment over gold.  The survey found moreover that men aged 18-34 who know what Bitcoin is are among the biggest Bitcoin fans: 22 percent would choose it over gold and were significantly more likely to say this than men age 55+.  Women aged 55-64 are the most skeptical: only 4 percent would choose it over gold.

Trust in Bitcoin is still quite low across most age ranges, the survey found. Percentages of people who are aware of Bitcoin and would choose to invest in Bitcoin over gold:

18-34: 20 percent

35-44: 12 percent

45-54: 13 percent

55-64: 7 percent

65+: 8 percent

IRS treats Bitcoins as property

“The taxman has spoken, said Richard Rubin and Carter Dougherty in Bloomberg.com.  In ‘its first substantive ruling on the issue,’ the Internal Revenue Service said this week that it will treat Bitcoins ‘as property’ for tax purposes, applying the same rules used to ‘govern stocks and barter transactions.’  The distinction may limit Bitcoin’s utility as a digital currency, but owners may benefit as profits from transactions will be taxed as capital gains, with a cap of 20 percent, and not as ordinary income, which is subject to a top tax rate of 39.6 percent.”  [Source: The Week, April 4, 2014]

Update: Bitcoin technical analysis

The Bitcoin market remains subdued following last month’s crash low, which came on the heels of the Mt. Gox debacle.  Since then the Bitcoin price has been consolidating above the late February low  and is showing signs of wanting to move higher in the near term.

Based on the rules of our technical discipline, a 2-day higher close above the 15-day moving average is needed to confirm an immediate-term bottom signal.  Bitcoin did manage to close decisively above the 15-day MA on March 3, but failed to follow through with a higher close.  It has remained below the Mar. 3 pivotal closing level ever since. 

Accordingly, a close above 677.69 (the Mar. 3 close) is needed to confirm an immediate-term bottom and renewed “buy” signal for Bitcoin.  This would not only fulfill the requirements of our technical discipline but would also establish a pattern of higher highs and higher lows, the definition of a renewed upward trend.  While we’re waiting for this signal, it’s interesting to note that Bitcoin has shown respect to the 15-day MA as a support/trend line in the last several days. 

Bitcoin's need for increased security

In an article for The Daily Ticker, Philip Pearlman writes of the need for increased security measures after bitcoin exchange Mt. Gox had $400 million stolen.  Mt. Gox was forced to file for bankruptcy last week after the recent theft, a move which caused panic among bitcoin investors and led to a temporary plunge in the virtual currency’s value.

As it turns out, Mt. Gox isn’t alone in its vulnerability to theft.  Over the last week, thefts have been reported at three different bitcoin sites.  Along with the $400 million stolen from Mt. Gox, Flexcoin had $600,000 in bitcoin stolen and the tiny exchange, Poloniex had 12% of its assets, amounting to $50,000, stolen.  Hackers have been probing for vulnerabilities at bitcoin exchanges, making them prime targets for robberies. 

As we discussed in last week’s commentary, a preliminary bottom was expected to be imminent and it came shortly after the announcement of the Mt. Gox debacle.  The negative publicity and selling panic that greeted the news was typical of the exhaustion phase of a major bear move, so it came as no surprise that bitcoin’s decline culminated last week.  Psychologically, most sellers have already exited the market and now the bargain hunters have re-entered. 

All that’s required to technically confirm an immediate-term bottom is for bitcoin to close two days higher above its 15-day moving average.  That hasn’t happened yet but it could by the end of the week. 

On a positive note, the Mt. Gox debacle has set the stage for some much-needed reforms in the bitcoin market.  As Pearlman observed, “with every attempt to hack into bitcoin operations, security officers at these companies learn more about the potential vulnerabilities inherent in running these types of operations which might potentially make them more secure” by allowing them adapt to security threats.

Bitcoin market nearing bottom, but problems remain

In my previous commentary I remarked that a bottom to the Bitcoin crash wasn't likely until the mainstream media began publishing negative headlines on Bitcoin.  Well the negative headlines have just started with the above video journalism piece by Reuters.  The intensity of negative sentiment behind this piece isn't quite strong enough to suggest emphatically that a bottom is in, but it does suggest a confirmed interim bottom is likely near.

On a related note, the apparent imminent bankruptcy of the Mt. Gox exchange has created a torrent of speculation as to the future of the electronic currency.  Experts point to the latest events as underscoring Bitcoin's ultra-speculative nature and lack of transparency.  The e-coin has been condemned by some as being more a commodity and less a currency.  The image problem currently plaguing Bitcoin has only been exacerbated by the Mt. Gox fiasco.

Bitcoin will undoubtedly survive this crisis, and its bear market will eventually end.  But until the dust settles investors are well advised to avoid new commitments to Bitcoin.  We continue to await a confirmed bottom signal from our indicators; for now the Bitcoin bear market remains intact.

Bitcoin’s silent crash

Bitcoin has recently suffered what may be termed a “silent crash” after a stellar performance in late 2013.  

After a blow-out performance in November, the Bitcoin price suffered a sharp pullback in December and spent most of January in a temporary holding pattern above the 900 level before finally sinking under the weight of selling pressure in February.  As of Feb. 14, the Bitcoin price was testing its dominant longer-term 40-week moving average, which answers to the widely followed 200-day MA.  This marks the first major test of a significant trend line for Bitcoin since last July.

The sell-off in the last two weeks has occurred under a veil of near silence among the mainstream media.  The same financial press which so vigorously praised the virtual currency’s prospects earlier this year has largely ignored the slide in value since Feb. 6.  This can be largely attributed to the recent equity market sell-off, which stole the spotlight from other investment vehicles. 

It’s nevertheless unusual that the media continue refusing coverage of the loss of Bitcoin’s value.  This leads us to speculate as to a possible motive.  One possibility is that the hedge funds which recently entered the Bitcoin market are using the decline as cover for accumulating a large stake in the market.  It’s no secret, after all, that many members of the financial press are in the employ (if not the outright ownership) of hedge fund moguls.  It’s therefore possible that the media silence on Bitcoin’s recent crash is bought and paid for by those who intend to ultimately profit from it.

Of course another reason for the lack of media interest in Bitcoin’s latest swoon is perhaps that the virtual currency has been temporarily overshadowed by the rally of the gold price.  Gold’s rally is a testament to its demand as a safe haven among investors spooked by the recent financial market turbulence, as well as the media hype regarding an emerging markets “crisis.” 

Until the media begins talking up Bitcoin’s crash in histrionic tones, investors should be wary of assuming the slide in the currency’s value has terminated.  The Bitcoin bear market is likely to persist until we see gloom-and-doom headlines announcing the currency’s demise, at which time we can justly assume a psychological turning point will be made.

PMX expands into Bitcoin arena

PMX Gold Bullion Sales has announced its entry into the Bitcoin arena.

Last year PMX launched its MGIV gold terminal in Boca Raton, Fla., which allows consumers to purchase varying denominations of fine gold bullion bars and coins using credit and debit cards.  

On Jan. 27 PMX said that the touch-screen terminal now has the ability to interface with most Bitcoin solutions already in the marketplace.

"The ability to mainstream an e-wallet into our precious metals terminal we feel helps commercialize the ability for a consumers to purchase Bitcoins,” Meris Kott, Managing Director of PMX Bullion Sales said.

Bitcoin and the magazine cover indicator

It had to happen sooner or later and this week it finally did.  

The Bitcoin phenomenon made the front cover of a major news magazine when Bloomberg Businessweek ran a story on the intricacies of Bitcoin mining.  The impressionist art on the front cover was evocative of the dream of fabulous wealth entertained by many Bitcoin enthusiasts.

The question that naturally comes to mind is whether or not this qualifies as a legitimate "magazine cover indicator" and does it therefore have predictive value?  Historically, whenever an investment craze makes the front cover of a major magazine it reflects the saturation of that investment and implies that the value of said investment has (temporarily at least) overextended.  A "correction" or decline in the investment's value often follows soon thereafter. 

Bitcoin is a bit different than more classical investment crazes, however, and requires an entirely different set of tools to evaluate it.  The appearance of Bitcoin on the Businessweek cover likely doesn't signal the end of the craze -- especially since the vital ingredients of full-fledged mania status are missing, viz. strong institutional and hedge fund involvement and widespread public participation.  What the cover could signify, however, is the commencement of an extended "internal correction" in Bitcoin's value.  

An internal correction can be defined as a lateral trading range-type market in which consolidation takes place over an undetermined length of time.  This would give Bitcoin a much-needed rest and would also take some of the heat off the market by removing it from the mainstream media spotlight.  This is necessary from the vantage point of the hedge funds who need a dull, uneventful market in order to quietly build a substantial position.  

Don't be surprised, then, if Bitcoin posts an underwhelming performance for a while.

A look at Bitcoin's immediate-term prospects

Bitcoin’s price line remains above its dominant immediate-term uptrend.  The immediate-term trend is defined by the 15-day simple moving average (MA), with the trend considered up as long as Bitcoin’s price line remains above the rising 15-day MA. 

A decisive close under the 15-day MA would temporarily break Bitcoin’s immediate-term (1-3 week) forward momentum and put temporary pressure on the virtual currency.  This is why it’s important that we monitor the area around 900 where the 15-day MA intersects in the daily chart shown below.

As long as Bitcoin stays above this trend line next week, participants (read hedge fund speculators) are likely to soon make another attempt at pushing Bitcoin back up to the previous high from early December 2013.

Hedge funds and the Bitcoin bubble

The first surprising hedge fund play of 2014 has emerged not in an established stock or commodity, but in the emerging digital payment platform known as Bitcoin.  While purists insist it is neither a currency nor a commodity, there’s no denying the growing popularity of Bitcoin.  The digital unit of stored value is attracting more and more interest from a wide array of individuals seeking an alternative to fiat currencies.  Now it seems that even major financial institutions are set to enter the fray.

As with any speculative medium, it was only a matter of time before hedge funds jumped on board the Bitcoin phenomenon.  According to a Bloomberg report, a San Francisco-based hedge fund is looking for a junior Bitcoin trader.  As one reporter put it, “Where big money is, hedge funds go as well.”

The Bitcoin protocol will undoubtedly attract more interest from hedge funds, which in turn will push its value higher.  As an analyst interviewed by Bloomberg pointed out, “Huge price fluctuations is exactly what [hedge funds] are looking for.  [They] love nothing more than mad volatility, and that’s exactly what you’ve seen in Bitcoin.”  And as we’ve seen in all too many cases, when hedge funds commit their capital to anything that’s already in an established uptrend, it can only succeed in generating additional upside momentum. 

Analysts have noted the lack of liquidity in the Bitcoin market and have suggested this as a reason why a bubble may not grow to gargantuan proportions.  Conventional trades in Bitcoin aren’t possible at this time due to the extremely slow transactions times, but that will likely soon change with Wall Street’s increasing presence in the market.  Hedge fund managers are momentum specialists who not only thrive on upward trending markets, but who can collectively create a manifold increase in momentum in the markets they focus on. 

Consider for instance the presence of hedge funds in certain individual China stocks.  You’ll recall the bubble in U.S.-listed China stocks from a few years ago.  While many of these stocks have since deflated, there are still to be found a few conspicuous examples of the active influence of hedge fund managers.  At the time the hedge funds took speculative positions in certain low-priced China shares, these stocks were highly illiquid.  Sometimes two or three days would go by without a single transaction being made in them.  Yet this didn’t deter the “hedgies” from taking a large stake in them. 

Two examples that come to mind are Ping An Insurance Group Co. (PNGAY) and the U.S. listed version of Agricultural Bank of China (ACGBY), both of which are known to be heavily owned by hedge funds.  To this day, despite China stocks being in a bear market, PNGAY has not only seen increased liquidity due to hedge fund presence, but the stock recently experienced a run-up that can only be attributed to hedge fund-created momentum.  Note the follow chart which shows PNGAY’s price trend in relation to the sagging Shanghai Composite Index, the main benchmark for Chinese stocks.  After experiencing a “blow off” top in November-December, PNGAY has since sagged.  Yet the heavy trading volume and upside momentum of recent months is testament to the power of hedge fund speculative activity in a historically illiquid market.

From the above example we can learn an unmistakable lesson, namely that hedge fund presence in Bitcoin is a double-edge sword.  While it will only serve to attract more attention toward the emerging virtual currency and eventually increase its liquidity, it will also create ever-increasing price gyrations.  This will defeat the goal of Bitcoin’s stability vis-à-vis the dollar that many of its exponents had hoped for.  In short, the early appearance of hedge funds in the Bitcoin market virtually assures the expansion of a massive bubble – and its eventual implosion.  

Bitcoin’s comeback in China

According to the Financial Times, Bitcoin has bounced back in China after financial institutions were banned from doing business with Bitcoin exchanges last month.  The comeback has helped push the digital payment protocol back above $1,000 a unit.

OneBitcoin exchange, BTCtrade, has continued using a third-party payment provider despite China’s central bank having banned connections with Bitcoin exchanges.  According to the Financial Times, BTCtrade hasn’t yet received a formal notice from regulators to cease and desist, and therefore remains active.

Meanwhile other exchanges have looked for loopholes in doing business with China.  Huobi, a Beijing-based exchange, allows users to make direct deposits in its own corporate bank account, according to FT, after which the company transfers the money to ts trading platform.

In the U.S., Bitcoin has been helped by gaming company Zynga’s recent move to begin accepting the virtual currency.  Player’s of Zynga’s popular FarmVille 2 and other social network games will have the option to make in-game purchases using Bitcoin, according to reports.  [Source: Financial Times, “Bitcoin bounces back in China to top $1,000,” by Simon Rabinovitch, 1/6/14]