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Bitcoin Market Report: 13 April 2014

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bitcoin-10-day-chart-april-13-smallAfter plunging $100 diving to to around $340 in conjunction with the 50/200 SMA "death cross" on the charts, also coinciding with tangible news out of China, the Bitcoin exchange rate has since bounced back around $80 on a later statement from the Peoples Bank of China that Bitcoin will not be banned in that country.

Since then the exchange rate has held steady at around the $420 level and seems content to consolidate there, for now at least. The next week will provide further insight as to the market sentiment.

 bitcoin-1-month-chart-april-13

For weeks now a succession of pervasive rumours out of China has negatively reduced sentiment as market participants feared that China was poised to ban Bitcoin altogether, causing mass selling among Chinese Bitcoin holders. When official news eventually came through announcements on the websites of Chinese websites, it was to say that banks would no longer allow deposits intended to exchange currency for Bitcoin, effectively meaning that the exchanges could no longer function in China, causing the exchange rate to plummet.

Shortly after the PBOC issued a statement that there is no intention to ban Bitcoin in China and it was not for them to do so anyway as Bitcoin was not under their control. 

The governor of the Peoples Bank of China, Zhou Xiaohuan said in a statement:

 

It is out of the question of banning bitcoin as it is not started by central bank.

Bitcoin is more a kind of tradable and collectible asset, such as stamps rather than a payment currency.

 

This is the best possible outcome for news out of China. Bitcoin will remain fully legal to hold and use in China providing the banks are not involved in exchanging Yuan for BTC. Major Chinese Bitcoin exchanges are already arranging to move offshore to other jurisdictions where RMB can be freely exchanged for BTC outside of the control of the Chinese banks and governments.  So basically nothing will change for Chinese Bitcoin participants and the slide of the markets in recent weeks based on these fears has been greatly over done. 

Elsewhere, Bitcoin miners are under increasing pressure from several directions. Bitcoin mining difficulty has been steadily rising, requiring exponentially more electrical energy, hardware, space and other resource to mine. Some Bitcoin mining operations are using as much electricity as a small town, with overall monthly operating costs running in to the millions of Dollars. The only way to fund ongoing mining operations is by dumping up to 90% of Bitcoin mined on to the market, necessary due to the low exchange rate, which in turn has suppressed the BTC price further - so it becomes self-defeating.

At these levels miners are going to have to make commercial decisions about expanding their operations in the face of lower rewards, and may mean far less newly mined Bitcoin being dumped on the market, again being supportive of the Bitcoin price.

There is a further dilemma for miners in that the limits of ASIC technology have just about been reached, meaning computers will fine it much harder to solve the math equations liberating Bitcoin, and therefore the amount mined progressively reducing with increasing difficulty. Also in the future block rewards will be halved from 25 to 12.5 Bitcoins, immediately reducing profitability by 50%.

It will be interesting to see what is needed to mine the last few million Bitcoin, but one thing is for sure, it will probably take at least another decade, and the amount of Bitcoin being dumped on the market exponentially reducing, being further supportive of the exchange rate in future.

With the China situation apparently resolved, no more negative news on the horizon, and with an ongoing flow of positive news from every sector of the Bitcoin industry, all that is required now is a shift in sentiment to one that reacts positively to positive news and keeps negative news in a proper perspective, focussing on the bigger picture and the future.

Over the last couple of days Bitcoin Reporter held a poll asking voters where they felt the lowest price would be for BTC during the current weakness.

bitcoin-poll-lowest-price-prediction-13-april

Lower than $150 - 8.28%
$150 to $199 - 6.21%
$200 to $249 - 10.34%
$250 to $299 - 11.72%
$300 to $350 - 17.24%
We have already seen the low - 46.21%

So by far the largest percentage of voters felt that we have already visited the low at $345 or so. A further 17% felt that we could return to the recent low or below.

This is overall very positive sentiment and one that is well founded in the fundamentals that the recent low precipitated by China was as low as the market will go now.

Bitcoin Market Outlook 

 bitcoin-6-month-chart-april-13

Overall the prospects for Bitcoin look much more bullish than this time last week. The 50/200 SMA "death cross" happened with impeccable timing taking $100 out of the market before bouncing back and moving in to a phase of consolidation. The death itself is usually very bearish and could have been the harbinger of further weakness to $300, or below but the better news out of China was enough to rescue BTC from the doldrums and hoist it to a level where real consolidation can take place over $400. Significantly, although the exchange rate slid on heavy selling volume, it bounced back on heavy buying volume.

The current fair value, all things being equal for Bitcoin is around $500, only falling below this level on very negative sentiment where the sellers were in control. If BTC can hold on to current levels for a few days then it is likely to move back up to $500, current fair value, for a more extended period of consolidation before beginning a new bull market. For this to happen, market participants need to start focussing on positive news and only reacting to bad news in a proper context, and not over-reacting. We also need to see much higher volume on the buy side than we have seen of late, and a major participant or two, so called "whales", putting in some big buy orders.

Overall we may well have seen a turning point this last week, with more bullish, market supporting sentiment just around the corner.

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