Recording my thoughts on the price of bitcoin. I was very bullish on the first quarter of 2014 and I turned out to be wrong. Oddly, the factors that I thought would lift the price did happen: more merchants started accepting bitcoin, the regulatory environment has remained favorable in the US, Wall Street has kept showing interest and a slew of startups started appearing. Yet, all these good news failed to buoy the price. One theory is that these news paled in comparison to the MtGox debacle. Like most people having a serious interest in bitcoin, I knew that they had solvency issues and were technically incompetent which led me to severely underestimate the impact of their failure. It seems many people simply do not grasp the concept that bitcoin is not a product of MtGox and think that bitcoin filed for bankruptcy, or something like that. It changes nothing that this is bunk, it means a lot of people who could have been buying bitcoin didnt. This leads me to a second point. I have a feeling that most bitcoin holder already own as much bitcoin as their risk tolerance permits. At some, good news just fail to produce more investments from the same people. The expected value of bitcoin may be high, but the general risk appetite for bitcoin is too scarce. It doesnt matter how good prospects look in the future, if more people arent buying now, the price will not rise. This would mean that most current transactions happen because of a difference in risk tolerance more than a view on the price. In this model, news which immediately affect the investment base, like a ban in China, or the failure of MtGox will always impact prices dramatically more than news which increase the usefulness of bitcoin itself. So if one is willing to buy into that argument, this makes it a buying opportunity. Youre effectively buying at a price which reflects a squeeze in risk appetite more than a true expectation. That said, an alternative story of course is that all these good news arent that good and that the price drop reflects a failure of bitcoin to reach the expected adoption. Well see in 6 months.
Posted on: Sun, 30 Mar 2014 19:00:34 +0000
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