The current rise in bitcoin’s price is more stable than its previous price changes, according to Martin Tillier, a financial advisor writing in Nasdaq, a provider of exchange technology, trading, information and public company services across six continents. Tillier says bitcoin’s previous price hikes were mysterious, but the current one is due to the devaluation of China’s currency.
Because this is a logical reason for the price surge, the market is acting with a forward discounting mechanism and some degree of appreciation is now built into the price. In addition, the interest from traders combined with the ability to short the currency allows the market to check upward spikes naturally, simply by attracting sellers.
Unlike the Euro, bitcoin’ supply is modeled on commodities rather than conventional currencies. Its limited supply and the growing difficulty in mining should, depending on adoption rates, deliver a “fairly predictable” upward path.
Bitcoin’s price previously underwent wild swings, shifting from below $100 to over $1,000 in four months prior to more than halving in a two-week period. “There is still uncertainty as to what caused that ‘bubblette’ and it is likely that we will never truly know,” Tillier wrote.
At around $200 in January of 2015, bitcoin’s price has been relatively stable. It remained between $200 and $300 against the U.S. dollar during 2015. The BTC/USD emerged from that range at the end of 2015 and now approaches $450.
Tillier claims the current price rise does not portend another bout of volatility. What is now happening is for a predictable reason: China. The majority of bitcoin trading originated in China as the government recognized the futility of banning a peer-to-peer currency.
According to bitcoincharts.com, the portion of trades against the Chinese Yuan has increased, currently standing at 81% for the past 30 days.
When an entity trades primarily against one currency, it broadly moves in the opposite direction to that currency. Gold, for example, trades lower as the U.S. dollar strengthens. In bitcoin’s case, the Chinese government enables the previously pegged Yuan to weaken, delivering strength to bitcoin.
Chinese investors, not accustomed to swings in the Yuan, are exchanging their currency for something their government can’t devalue. This action exaggerates bitcoin’s movement.
This price appreciation is “perfectly logical and is based on fundamental factors,” Tillier noted. This fact makes it more likely the price change will proceed in an orderly manner, and it is extremely unlikely a sudden collapse will follow.
Bitcoin supporters should hope a more predictable and less volatile price continues since a less volatile price is needed for the number of merchants accepting bitcoin to increase. More merchant acceptance will drive sustained growth in bitcoin’s price.
Image from Shutterstock. Chart from BitcoinCharts.com
Last modified (UTC): January 11, 2016 17:28