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Will Uncertainty Keep Bitcoin Range Bound?

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bitcoin-price-chart-feb-2014If there is one thing financial markets, including Bitcoin, do not like, it is uncertainty, and right now Bitcoin is awash with uncertainty.

Hard on the heels of the Mt. Gox debacle with traders not being able to withdraw cash or Bitcoin amid fears that the long known about "transaction malleability" issue could have more far reaching consequences, comes news of impending government regulation. 

 During the last few years, and last year in particular as Bitcoin was reaching dizzy new heights on a wave of euphoria, there was little holding Bitcoin back because no one except enthusiasts took it seriously.

When Bitcoin exuberance really took hold and sent Bitcoin parabolic, as with all bull markets numerous other players jumped on the bandwagon for a slice of the action, largely driven in China, and Bitcoin reached an all time high.

After that an ongoing series of events largely due to government controls in China, previously a very high volume buyer, and in other countries caused the Bitcoin price to fall dramatically.  Just as Bitcoin had seemingly overcome and priced in these events, and showing signs of stability at least, comes the shocks following the Mr. Gox situation, Bitcoin transaction malleability issues and the threat of government regulation, all of which have converged to drive the price back in to the 600 range.

Unlike previous events however which were relatively isolated and the Bitcoin market could price in and overcome, the ongoing issues at Mt. Gox and the ramifications for other exchanges and wallets, the transaction malleability issue and impending regulation could well be much longer term situations.

In addition to the transaction malleability issue in Bitcoin, people are now asking what other issues are lurking in the Bitcoin software and infrastructure that could suddenly rear up and cause the next tremors in the Bitcoin market.

These are all medium term uncertainties that could cause Bitcoin to be range bound between 500 and 750 for many months, with people afraid to buy and hold in volume for fear of what could happen next.

While this might seem like bad news for those holding Bitcoin now, especially for those who bought at higher prices, it really is not bad news at all in the long term.

The biggest issue with Bitcoin has been extreme price volatility, due is part to comparatively low volumes, and extreme price sensitivity to ongoing events. For Bitcoin to become more widely accepted this volatility must be greatly reduced to levels seen in other financial markets, then and only then can Bitcoin mature in to a long term financial instrument with normal levels of volatility and price driven by market forces.

When this happens, Bitcoin will attract the attention of a much wider audience as well as financial institutions which will provide a solid foundation for the Bitcoin price to reach new highs in an orderly manner with high volume.

Price stability is also crucial if Bitcoin is to be widely adopted as a form of payment for goods and services.

The time scales are obviously unknown, but with the current ongoing and unresolved issues, together with those that will inevitable arise in the future, Bitcoin looks set to be range bound for the foreseeable future, probably between 500 to 750 with peaks and troughs above and below these levels with ongoing events in this young but maturing market.

Ultimately there is no reason why Bitcoin should not become a global financial monetary system alongside or replacing fiat currencies, and certainly the money of the Internet, all of which could see the Bitcoin exchange rate many orders of magnitude from where it is today.

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