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Bitcoin Market Report: 25 April 2014

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bullish-bearishUntil early this morning UTC, the Bitcoin exchange rate was still overcoming periodic weakness to continue a week long consolidation in the range $500 channel. Today BTC had made it back over the $500 level until suddenly, around 04:00 UTC very large sell orders relating to further Chinese rumours, began to hit the market taking $50 and 10% off the exchange rate.

At the time of writing, bargain hunters have moved in to lift BTC to $460 and away from the $450 support level.

Bitcoin chart 25 April 2014

The catalyst now appears to have been further news out of China via Calxin news, around 04:00 UTC causing an immediate and dramatic plunge in the exchange rate. The ensuing price plunge would have taken out successive automatic stops of traders, causing a cascading slide in the exchange rate. Calxin has not always proven to be the most reliable in the past. Until and if official confirmation appears it is pointless examining the details, which might after all be an attempt at exchange rate manipulation.  If official news does surface, Bitcoin Reporter will provide coverage and analysis.

Stop Press: A further large wave of selling hit the market around 11:30 UTC taking the exchange rate below $450. If The market  can bounce back above the support level in the near future, further progress can be made back to $500 and consolidation. If this level does not hold, the most likely scenario is a test of support at $410. 

On a positive note, how the exchange rate performs now will be an excellent indication of the short term direction. If BTC can shrug off this setback, successfully test support at $450 and climb back to the consolidation level of $490 to $520, this will be a very bullish sign that the market wants to and can consolidate at this level before commencing the next phase of the long term bull market. 

Events such as these do highlight just how illiquid the market is, with probably no more than 5 million BTC in general circulation, the remainder being hoarded for future gains. $5 million sell orders in most markets would not move the exchange rate anywhere near as much, and in the forex market probably not at all. 

This does leave the Bitcoin market open to manipulation, a situation that is unlikely to change as the increase in Bitcoin in circulation is very slow, and can only reach a theoretical 21 million, although will be millions less ultimately due to loss. Mt. Gox alone could have taken half a million Bitcoin out of the market.

This situation hold serious ramifications moving forward. To start with it makes BTC very difficult to actively trade because large players can so easily manipulate the price in both directions, taking out many levels of trading stops causing a cascading effect which those with large funds can easily exploit. All they have to do is to cause a price fall by shorting the market, taking out the stops of other traders which cause further losses and further stops to be taken out causing a cascading fall in the exchange rate, and then go long, buying back in once the market has bottomed out. The same applies in the opposite direction.

Bitcoin is not a day or short term traders market, at least until the exchange rate is orders of magnitudes higher - $10,000+ - when tens of millions of Dollars will be needed to manipulate the market, out of the range of most players. Bitcoin is very much a buy and hold market - the buying in price almost does not matter below $1000, because whatever the entry level it will most likely look like loose change in 2, 3, 5 years time.

There are much more serious implications arising from potential market manipulation and the resultant volatility. Take up of Bitcoin by merchants will be greatly influenced by how stable or otherwise the exchange rate is on an ongoing basis. Most merchants will be converting BTC to fiat immediately. Volatility in the Bitcoin exchange rate makes it very difficult to fix prices of good and services in Bitcoin, because especially with merchants working on a small profit margin, all profits for goods could be wiped out and become losses in minutes. So for many merchants it is simply not worth the risk of offering Bitcoin as a payment option.

So what is the solution?

One, and perhaps the only solution is for Bitcoin exchanges to agree between them to restrict the size of buy and sell orders so that tens of thousands of BTC cannot be bought or sold at one. Such limits would have to be daily limits, otherwise very large orders could simply be divided in to a number of smaller successive orders. A "per trader" limit of 1000 BTC per day seems reasonable, and more than enough for most traders who have no intention of gaming the market at the expense of everyone else. Of course it would not be effective in situations where the market is manipulated through rumours causing mass selling panic.

These all reflect the fact however that Bitcoin is still in an embryonic phase of evolution,  and all major issues will be resolved as Bitcoin matures.

Bitcoin Market Outlook

Bitcoin chart year to date 

With the unexpected events of the the last few hours comes a crucial test of the resilience and resolve of the Bitcoin market and of sentiment. The next crucial support level, which the seller failed to breach, is around $450. Should that fail to hold the market may have to re-test the $400 level which would no doubt be the catalyst for a wave of bargain hunting, quickly lifting the exchange rate. There is nothing to suggest that the market could or should fall below the $410 support level in view of the absence of negative new and ongoing flow of positive news.

However, the exchange rate plunge of today has placed it back in to the long term down trend line which will need to be broken soon if the market is to recover.

Holders of BTC have no reason to panic and will sleep better at night putting all BTC in cold storage for a year or two at least, after which it will most likely be seen, looking back, how much of a bargain BTC has been this year at any price.

We now have a straight battle between the bulls and the bears. The bulls need to rake the market back up to the pre-dump level of around $500 to continue consolidation, before the bears can drag the market below $450 most likely to re-test $400 before bouncing back. The outcome should be clearer in the next couple of days.

Stop Press: A further large wave of selling hit the market around 11:30 UTC taking the exchange rate below $450. If The market  can bounce back above the support level in the near future, further progress can be made back to $500 and consolidation. If this level does not hold, the most likely scenario is a test of support at $410. 

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