Market Update 15 Nov 2013: Bitcoin Explosion


Over the last week, and over the last month, assets have followed the same basic pattern: stocks mostly higher and currencies, bonds, and commodities mostly lower.  Bitcoin has been the biggest winner by far, rising 29% in the last week and 179% over the last month. In addition to the fast rising price, global trading patterns are shifting as well. Read more below.

The JPY was was the weakest currency, falling 1.2% over the last week and 2.7% over the last month, followed by the CAD which lost 0.6% this week and 2.5% over the last month. The USD fared the best, declining only 0.1% this week, and 1.3% for the last month. The dollar closed at 24.2 mg, and sits 62.7% above its half-life curve. In the last few days the USD has shown some renewed strength, and on Wednesday set a new record high of 67% above the price predicted by the half-life curve.

Bonds were mostly lower, with the short term SHY dropping 0.1% for the week and 1.1% for the month. The long term TLT recovered 1.1% this week, but still fell 0.9% over the last month, performing considerably better than the underlying dollar. TLT continues to struggle with resistance between 2.5 and 2.55 grams.

Stocks were mostly higher, except for the HUI Gold Bugs Index, which fell 1.2% this week, but still managed to gain 2.0% over the last month. At 5.48 g, the HUI is 5.6% above it's recent lows, but well below both its 200 day moving average, and its long term overhead resistance at about 6.5 g.

For the last week, stocks on Japan's Nikkei Index rose the most, adding 6.3%, while the S&P 500 and Dow gained 1.4% and 1.1% respectively. Over the last month, however, the picture reverses, with the S&P gaining 4.5% while the Nikkei advanced just 2.2%. The S&P and Dow appear to be breaking out to new multi-year highs, while the Nikkei is just below it's overhead resistance at 3.68 g.

Commodities were mixed, led by coffee in both directions! For the week, coffee was the biggest gainer, rising 1.5%, but for the last month, it was the biggest loser, falling a whopping 10.4%.  Platinum gained 3.4% over the last month, but lost 0.7% this week to close at 34.7 g, now 8.2% above gold parity. Silver was down 5.0% this week, but is only 0.6% lower for the month, closing at 0.50 g/oz.

As mentioned above, Bitcoin has been exploding in price over the last month. It has also been internationalizing, especially in Asia. 31% of all exchanges between BTC and government-backed currencies now take place in China, in CNY. The world's largest single bitcoin exchange is now, based in Shanghai. Although still smaller than all the USD exchanges combined, BTC China offers the highest prices for bitcoins, and its customer base is growing fast.

There are several reasons that this makes sense. First, the Renminbi is not generally available for foreigners to hold. So for those outside China, holding bitcoins in a BTC China account allows them to get exposure to the CNY. And for those inside China, Bitcoin makes it possible (and even easy!) to use their CNY to purchase goods and services abroad, over the internet or when traveling, and allows them to get exposure to USD, EUR, and other foreign currencies.

I think this all bodes well for Bitcoin. Where Mt. Gox once handled 80% of all BTC currency exchange, it now handles about 24%. Where once almost all exchanges were in USD, they are now spreading out into EUR and CNY as well. There are many more options to buy and sell gold with bitcoins, as well. And spreads are getting smaller as these markets become more liquid.

In the long run, Bitcoin's price is really driven by adoption rate. As bticoins become more useful to more people, and as their turnover rate increases (the "velocity of money" increases) their value relative to other currencies, including gold, increases.

Since its inception, Bitcoin has shown an exponential growth in value. Because of this, linear charts have a hard time capturing what is happening; prices just shoot up off the chart, appear to swing wildly, and the early years appear to be a long flat line hovering just above zero. For these reasons, I prefer a logarithmic chart like the one below.

There are four lines on this chart. the green represents the value of the USD, the heavy blue represents BTC, the light gray uptrend line shows the general trend for Bitcoin's price, and the horizontal yellow line shows the price of one troy ounce of gold (31.105 grams, or 31,105 mg). Bitcoin finished last week at about 1/3 of an ounce, and currently trades at about 1/2 of an ounce (a bit more in China, 18.9 g, a bit less on Bitstamp, 15.0 g). All this is after the big "spike and crash" on Tuesday the 19th, when BTC was trading as high as 22 g in the US, and 28 g in China.

So we are now knocking on the door of 1 BTC = 1 ounce of gold.

But to actually get there may take some time. the uptrend line I have drawn means that Bitcoin's value increases ten-fold about every 6 quarters. In mid-2012, the value was about 100 mg, so I would expect the value to be stably above 1,000 mg (1 g) by the end of 2013. And another year and a half should see the price stably above 10 g if the uptrend continues. Only 6 months later, at the end of 2015, the price should be stably above 31.1 g, or one ounce of gold.

We are currently well over 10,000 mg. So the BTC price could fall by 90% from here and still be well above the exponential uptrend line. Or the price could move sideways for more than a year and still be above the trend line. Of course, it is also possible that the price could continue to rise rapidly and achieve the one ounce target in a matter of weeks or months, rather than years.

The point is that unless something derails this freight train of widening adoption and increasing utility, I think that 1 BTC buying 1 ounce of gold  by the end of 2015 is baked in the cake. Note that there is no reason it should stop there, but I think that will be a major psychological milestone.

BTC in gold

Bitcoin is still a highly speculative investment. There are many hurdles to overcome – technical, social and legal, before the free market internet currency becomes mainstream. Any one of these could slam the project so hard that bitcoins would essentially lose all of their value.  But every day that passes, and with every new user, and every new shop and site that accepts bitcoins, the risks decline and Bitcoin's value is enhanced.

I apologize for the lack of regular posts to the site over the last few weeks. My family has been traveling, and just keeping the charts up to date has been all I could handle. Now we are settled in Argentina for a few months, and I hope to return to a more regular schedule.

On December 7 & 8, I will be attending the Latin American Bitcoin Conference in Buenos Aires. It looks like it will be an outstanding chance to meet many of the leaders of the free market money revolution, along with many Bitcoin developers and entrepreneurs from around the world. If you will be attending, please drop me an email and I would love to get together.

Table of prices in gold for week ending 15-Nov-2013

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