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Bitcoin Market Report: 11 April 2014

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bitcoin-chart-6-month-april-11-smallIt has been a dramatic couple of days for Bitcoin with the exchange rate spiking as low as $345 on Friday before recovering to the $400 level. Bitcoin Reporter had been reporting for a couple of weeks that the pending "death cross" formation of 50 SMA through 200 SMA would likely see another $100 off the exchange rate.

The catalyst for the price slide was once again China with more official and tangible confirmation of currency restrictions which were confirmed on the websites of Chinese Bitcoin exchanges.

 bitcoin-chart-6-month-april-11

The 50/200 SMA "death cross" has never been tested before in the Bitcoin market, but sure enough it performed as it does in more liquid markets, with the convergence being the harbinger of a bearish steep slide in the exchange rate of $100 on the day of the convergence as predicted by Bitcoin Reporter over the last couple of weeks.

The catalyst for the slide from around $450 to a  low of $345 was tangible confirmation of a Chinese government clampdown on Bitcoin by restricting fiat currency deposits and transactions relating to BTC. 

Trend lines on the charts and how they inter-relate is a measure of market sentiment, with the 50/200 SMA convergence being an indicator of very bearish sentiment unsupported by significant buying. Under these conditions, as we have been consistently seeing for many weeks, a steady stream of good news is ignored, while negative news sends the market down to a lower level. This was accentuated by the "death cross" just as the news broke that exchanges in China were posting official notifications on their sites about the government restrictions. Even though the market has been reacting to rumours for a few weeks, this confluence was enough to take $100 of the exchange rate.

The market later quickly recovered, adding $50 when the governor of the Chinese Central bank moved to assure that there is "no ban issue" due to the fact that Bitcoin itself is out of the jurisdiction of China.

What the Chinese government is saying therefore is that although they have no jurisdiction over Bitcoin, they do have jurisdiction over the banks and the Yuan as well as other currencies being converted to Yuan, and since they do not approve of or support Bitcoin, they will not allow banks to engage in fiat currency transactions involving Bitcoin.

This means that Bitcoin itself and Bitcoin exchanges are free to operate in China, but not using the banking system. In practice this is similar to a ban since the the whole purpose of an exchange is by definition to exchange fiat currency for Bitcoin and vice versa. It would seem that it remains legal to use Bitcoin to purchase goods and services.

So where does this leave the Chinese situation? It does look very negative for the exchanges. It is difficult to see how they can function as an exchange while not being allowed to use fiat currency or the banking system. The Chinese people on the other hand are presumably able to use exchanges in other countries, such as Bitstamp, providing they can transfer Yuan without violating government and banking rules. Only time will tell how this pans out.

In the meantime the situation in China, after weeks of rumours, does seem much more definitive, removing some uncertainty from the market and a major reason for the price weakness of recent weeks.

Bitcoin Market Outlook

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 Although the market has rallied following the assurance from China that Bitcoin is not to be completely banned, overall confidence has taken another hit due to this news and the more bearish sentiment generally, confirmed by the "death cross". It is difficult to see how China could further negatively impact the market, but with sentiment as negative as it is, anything can happen. 

The market needs to find an equilibrium, a price at which participants feel confident buying in volume again. Current fair value based on the chart and the fundamentals is around the $500 mark, but bearish sentiment and and a succession of negative news has conspired to drive the price lower. If the market can turn around and head back towards the $500 level, that would be a good platform for short to medium term consolidation before resuming the bull market. The long term prospects for Bitcoin are as solid as ever with all the fundamentals pointing to a much higher exchange rate in the years to come for those willing to ignore the background noise and hold for the future rewards.

For now the market needs to find that all important level where buying confidence can be restored and the trend reversed. Taking all factors in to account, Bitcoin Reporter believes this level to be around $400 after bouncing from the $345 low, but with sentiment as it is recently the market could decide it wants to form a lower base over the next few days.

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