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Bitcoin Market Report: 3 April 2014

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bitcoin-chart-1-month-april-3-smallDespite a valiant effort to twice move beyond the $500 level this week and current fair value, both efforts by the Bitcoin market efforts were sabotaged by yet more news coming out of China. Even though the news was not new and added nothing substantive to previous rumours and news, the effect on the market was swift, taking the exchange rate down a total of $80 or 16%. 

Further rumours that Neo & Bee, a start-up Bitcoin company in Cyprus is already insolvent further dampened the market.

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Bitcoin Reporter has been reporting for the last 2 weeks that the market is at a crossroads with a choice between returning to and consolidating fair current value of around $500 - $550 or capitulating to the 50/200 day moving average "death cross" which could see the exchange rate fall to between £300 and $350.

Towards the middle of the week it began to look as if the market had chosen the former as the market twice regained the $500 level after a solid move upwards. That was until the same rumours out of China resurfaced again regarding the regulation and banning of deposits intended for trading Bitcoin on Chinese exchanges. This is a translation of a notice issued by BTC38:

 

We regret to let you know that as of midnight tonight (Apr. 2), you will no longer be able to fund your CNY account at BTC38 due to the latest PBOC regulation enforcement. BTC38 had been using third-party payment agent to process funds and that is no longer allowed according to PBOC regulation. Therefore, we have to suspend deposits via BTC38 e-code as well as bank transfers (transfers in).

 

Recently, there are rumors on the Internet stating that the PBOC will shut down all Chinese virtual currency trading platforms. Those are just rumors and the PBOC have stated that they have no plan to do so. Today's change to our platform is the PBOC's enforcement of their Dec. 5, 2013 regulation guidelines regarding virtual currency exchanges. The message was delivered to us this evening via our third-party payment providers and our banks.

 

While previous exchange rate falls were based on rumours, these latest announcements were more grounded in fact as official announcements from exchanges in China that were actually affected.

So what caused the market to react so negatively by selling off on much higher volume? It is highly likely that whereas market participants in the West has already priced China out of the market, it is Chinese holders of Bitcoin that are dumping there holdings faced with the prospect of not being able to liquidate BTC in future as the tough new regulations take effect. It was Chinese buyers that were largely responsible for the bubble earlier this year when the exchange rate soared over the $1000 mark on high volume. Although many of these Chinese buyers subsequently dumped their holdings as the Chinese government and Peoples Bank of China clamped down on Bitcoin, causing the market to shed 50% over a short time scale, it is likely that there are still large holdings in China which are now being liquidated on the back of the latest regulatory position.  

The Bitcoin exchange rate has stablised for now around the $420 level, whether it can hold that level or not will largely depend on whether there is still significant BTC to be liquidated out of China.

Elsewhere a new company that became somewhat of an icon of Bitcoin for a short while - Neo & Bee in Cyprus -  appears to be in trouble, further dampening already negative sentiment in the Bitcoin market.

On the positive side, a steady stream of good news for Bitcoin fails to impress or rally the market significantly. These positive news items include the Bank of Montreal taking Bitcoin seriously, talking about the possibility of becoming a BTC intermediary if the exchange rate stablises. 

Bitcoin also received a positive boost from a somewhat unexpected direction when Federal Reserve Bank of St. Louis VP David Andolfatto held a talk entitled "Bitcoin and Beyond".  During the session which highlighted an impressive comprehension of Bitcoin technology, Andolfatto emphasised the transactional efficiency of Bitcoin in stark contrast to the highly inefficient and archaic conventional banking system, of which he stated of Bitcoin:

 

The threat of entry into the money and payments system forces traditional institutions to adapt or die.

 

As has been the case however for weeks now, even positive developments such as these fail to impress of move the Bitcoin market which seems preoccupied only with negative news and reacting downwards accordingly.

Market Outlook For The Few Days 

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Although the market attempted to rally above $500 twice, showing that there are bullish participants ready to commit at these levels and consolidate the market around current fair value, selling on high volume on the ongoing succession of news and rumours out of China overwhelmed the bulls as the market slid down to below $420.

In the meantime the "death cross" of the 50 day moving average and 200 day moving average looms ever closer, the triggering of which could send the market spinning down to the $300 - $350 level. Perhaps such a capitulation is what is needed now to shake out the bears allowing the bulls to regain control and resume a sustainable upwards trend.

There is still time for the market to put China behind it and climb back to the safety of over $500 where extended consolidation can take place  - the next few days will be crucial. 

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