Why has Bitcoin value become Stagnant?

August 5, 2014 11:12 UTC

Bitcoin opened July with a value of circa $640 and by the end of the month it settled at just under $590. During the month of July several events occurred that should have had an effect on the value of, what is recognized as, a volatile commodity (all currencies can be thought of as commodities in economics). During the month of July the proposed New York regulations for traders that accept bitcoins, as well as those that store them, were announced (BitLicense). This announcement happened on July 17th, yet the Bitcoin value remained stable until July 20th. Why did the market not act on news that would have adversely affected price only two or three months before?


Dell became the biggest e-commerce business to announce they would be accepting Bitcoin (only an option for their US customers admittedly) on July 18th, and this announcement had little discernible effect on market price either. July proved to be a busy month with acceptance announcements from Baltic Air, Wikipedia, the German newspaper ‘Taz’, as well as the RNLI (Royal National Lifeboat Institution). So why did so many news items have so little effect on Bitcoin value? There are questions being asked. Has OKCoin been massaging Bitcoin trading volumes by the use of trading ‘bots’? Is there evidence of an early adopter, or two, cashing out hoardings? Are people becoming disillusioned with the lack of value growth (in decline overall since January)?

Interestingly it has been suggested that Dell were cashing out the bitcoins they received as payment as that input to the market was acting to suppress Bitcoin value. However, this would suppose that a larger than expected number of customers were buying using bitcoins and that those bitcoins had been hoarded. If bitcoins had been purchased to fund the transaction then surely the affect of offloading the bitcoins would have been cancelled out by the effect of purchasing the bitcoins, changes to the Bitcoin value would have been negated.

Regarding the allegation that OKCoin has been massaging the trading figures. These allegations are based on trading patterns within the exchange with peaks breaking the 280,000 BTC barrier on three separate occasions between the months of February and April before dropping back to 11,000 BTC 12th July. This being the lowest trading volume in over six months and is a bit of a drop from the 280,000 figure by any estimation. However, OKCoin has, through its spokesman Changpeng Zhao, stated: “When the price is stable, like it has been dead-stable in the past couple days, people trade less, many HFT/Algo’s triggers won’t trigger, and you see low volumes. It’s pretty simple!”

Are people now unresponsive to bad and good Bitcoin news?

Maybe, that is the simple explanation. Perhaps people had become so used to reading the good news/bad news in the media generated by the volatility that the newly discovered stability is leading to boredom, and that is acting to suppress trading volumes. Bitcoin value is different from gold value in that if people hoard gold the price must rise as gold is used in both electronics and jewellery.  If people hoard gold, the market must adjust the price upwards to encourage some to place some of their gold onto the market. If Bitcoin value were climbing it is likely that some people would sell their bitcoins to take profit whereas others would choose not to spend their bitcoins in anticipation of further increases in Bitcoin value.

I would suggest that the value of Bitcoin is heavily influenced by the level of media attention is receives at any point in time. A percentage of the people who read news about Bitcoin act to either invest or dispose of their bitcoins, and these actions affect the price.  Perhaps it is simply a coincidence that Dell and Lawsky hit the news together, and one acted to cancel the other out. What do you think?

Featured image by Shutterstock.

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@P.J. Delaney@delboyir

Masters in Public Administration, Bachelors in Mgt., I live in Ireland, I have a bit of a background in Economics and lots of opinions on everything else.