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.