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Market Review: Bitcoin Seeking Fair Value

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6-month-bitcoin-chart-march-22-smallThe Bitcoin exchange rate continued to slide towards the end of the week in the absence of any really positive news and in the face of, later refuted, rumours that China was intending to ban Bitcoin altogether. In recent weeks Bitcoin has been in a predominantly bearish trend, with good news not significantly moving the price upwards, but negative news causing the price to slide.

The implication here is that the euphoria and wild speculative action of the last year has given way to an air of realism.

10-day-bitcoin-chart-march-22

After returning to near the $1000 level following the sell-off in China due to government regulation earlier in the year, the exchange rate has been in an overall downwards trend, motivated in no small part to the increasingly ominous Mt. Gox situation as withdrawals were restricted and the situation there looking increasingly dire. By the time that Mt. Gox eventually collapsed, its demise was already more or less factored in to the exchange rate and exerted remarkably little additional effect on the price.

What has apparently changed though is liquidity and sentiment. Mt. Gox took 750,000 Bitcoin that were clearly being used for speculation - there is no other reason to keep Bitcoin at Mt. Gox - out of circulation, along with many of the active speculators. The mood at the same time switched from bullish to bearish as we can see from the charts, represented in both lower volume for the most part and lower prices.

The price slide this week was initially precipitated by the problems at highly respected and previously reliable web based Bitcoin wallet provider Blockchain.info, the service for which was largely inaccessible for a couple of days, effectively isolating users from millions of Dollars worth of Bitcoin. Although Blockchain.info eventually resolved the issues and restored service in a highly professional manner without any loss of Bitcoin, following close on the heels of the Mt. Gox debacle confidence in Bitcoin took another dive with the exchange rate sliding to the $600 level amid much higher selling volume.

By this time sentiment was clearly negatively biased with the market being indifferent to a stream of good news, but reacting negatively to bad news as happened yesterday, 21 March, when a rumour surfaced that China intended to ban Bitcoin altogether. Although this news was later denied and retracted, another spike in resultant selling volume saw the exchange rate to slide to $570. Although there was a feeble attempt at a bounce from that level when the news was retracted, it soon slid back again among negative overall sentiment, which is where we are today.

So Where Does Bitcoin Go From Here?

6-month-bitcoin-chart-march-22

The immediate future of Bitcoin for the next few months is playing out now as can be seen from the convergence of the 50 day and 200 day (purple) moving averages.

The 200 day moving average is still showing an upward trend of $100 per month as reported in our previous market review. 

The 50 day moving average however flattened out from its previously steep up-trend, coincident with the trouble and eventual downfall of Mt. Gox, and has now turned to a negative direction with overall negative sentiment, lack of liquidity and latterly  with the events of this last week.

If the 50 day moving average crosses the 200 day moving average on the 6 month chart above this would be a very bearish signal that could see the exchange rate decline accelerate resulting in falls of a further $100 to $200 from current levels. Should the convergence not occur then the exchange rate will probably trend sideways between $550 and $600 pending further news whether positive or negative.

Note on the first chart, the 10 day chart, when the 50 day MA crossed down through the 200 day MA, a sharp decline from $630 to $570 took place. If this cross over takes place on the 6 month chart then the fall could be proportionately steeper.

With current sentiment being negative, good news will need to be exceptional whereas bad news quite minimal to move the market in that direction.

Really good news such as a major retailer taking Bitcoin as payment could turn the market around towards the long-term up-trend which could see the exchange rate add another $100 in April to around the $700 level.

Conversely, further bad news against the backdrop of negative market sentiment could cause the moving average convergence that could spell a further $200 fall in the exchange rate.

Also to keep in mind is that the mainstream media and naysayers will jump on further price falls with glee and an "I told you so" attitude, while governments move further towards regulation, putting further pressure on Bitcoin.

Overall Bitcoin appears to be seeking fair value. Until recently the Bitcoin exchange rate had little to do with value and everything to do with rampant speculation as can be seen from the charts. The market is now much calmer and being driven much more by regular market dynamics which always seeks fair value.

No one knows what "fair value" is for Bitcoin yet, but over the next weeks and months the market seems set to determine this crucial factor as a platform for Bitcoin to move forward.   

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