For many bitcoin investors, understanding the movements of market behavior is the holy grail of making a profit when trading bitcoin. The market behavior of bitcoin is not dissimilar to other trading assets, However, it is hard for many to remember that the investment cycle of bitcoin is still in relative infancy.
There are several factors which influences market behavior of bitcoin. These include:
- trading volumes,
- regulatory impact,
- trading pair diversity, and
- market maturity.
When bitcoin began there was no market to transact or trade. In 2009, the first full calendar year of the pioneering cryptoasset, there was hardly any bitcoin transactions, even though a new batch of 50 bitcoins was produced every 10 minutes.
It wasn’t until October 2009, that the first bitcoin transaction took place with the U.S. dollar. Since then, to fulfill the buying and selling of bitcoin several coin exchanges have firmly established themselves as leaders in the market.
Bitcoin, and other cryptoassets, have established themselves as relatively more liquid when compared to other investment assets such as bonds, securities and shares.
Cryptoassets have an inherent advantage in their liquidity because they are digital. Digital assets, by nature, are intangible and can therefore be quickly transacted through the internet. The speed at which cryptoassets, including bitcoin, can be transacted sets them apart from other investments assets. If you consider real estate and even share trading, cryptoassets are by far superior.
The liquidity of bitcoin, has dramatically increased over time. What used to be one exchange, Mt. Gox has now expanded to over hundreds. Not only has the volume of transactions increased, but also the dollar amounts. The market has grown to be comparable to that of typical forex exchanges.
The more activity will lead to greater liquidity, due to more buyers and sellers. Overtime, further regulation would likely be imposed providing greater trust and reliability with using cryptoasset exchanges.
Regulatory Impact on the Bitcoin Market
Cryptocurrencies are new to the investment world, and thus each country and even state (for e.g. USA), have different regulations. In fact, in many cases regulations have yet to be developed and implemented.
The changes in regulations will have a significant impact in the market movements of bitcoin.
On January 6, 2017, the People’s Bank of China declared that it would investigate bitcoin trading activities on Chinese coin exchanges. Following this announcement, new regulations were introduced that required limiting margin trading, imposed trading fees and anti-money laundering measures that included Know Your Customer evidence. Though these regulations provided a better framework for the trading of bitcoin to operate it, it did dampen trading volumes of bitcoin in China.
Fortunately, the impact of these regulations were not as severe as the down turn that occurred in 2013. The reason being the activity was far more stronger and in depth than in the past. With far more exchanges and more trading pairing options, the activity of bitcoin was able to withstanding and recover quickly from the Bank of China change of regulations.
Trading Pair Diversity with Bitcoin
The need to offer a diverse range of trading pair options is important for the development and liquidity of the bitcoin market.
During the early stages of bitcoin, trading pairs were limited to only a couple of fiat currencies and exchanges. The broadening of trading pairs with fiat currencies is extremely important, because they allow for integration into the mainstream financial infrastructure. And through this integration, it can then be more widely used by the general public.
As a good strategy in determining the value of bitcoin and other cryptocurrencies is the broadening of trade pair diversity. The more trade pair diversity, the great the liquidity and strength of bitcoin.
Volatility will fall as Bitcoin matures
With great trading volume, liquidity, coin exchanges and diversity, bitcoin will become more stable and robust. Bitcoin will be able to withstand market shocks and reduce in volatility. Price swings will dampen and stability will become aligned with fiat currencies. Perhaps even more stable!
The current trend of bitcoin is that volatility is reducing as the market matures. There is no doubt, that bitcoin is still in a phase of market development, growth and integration. But as it matures further expect bitcoin to become more stable.
Correlation of Bitcoin Marketplace Behavior
In the early stages of bitcoin, the marketplace was most confined to innovators leaving out the broader capital market. With only developers and early adopters trading bitcoin, the pool of capital was extremely limited. Therefore the movement in bitcoin value did not correlate with general market indicators.
In today’s world, bitcoin has now become a regular news update with mainstream media. The expansion into global capital markets, being accepted as a viable investment asset, now sees the value of bitcoin being influenced by market behavior just like other investment assets. In fact, bitcoin is now seen as an alternative to gold – a safe haven to go to in the even of bad news. Correlation of the price of bitcoin can be seen with the surprise news of Brexit or Trump winning election.
As bitcoin matures further, expect to see further correlation with geo-political announcements, fiat currency devaluation and adoption by mainstream financial services.
Speculation Bitcoin is not a high risk gamble
Maturity of bitcoin in the market place is key in reducing volatility. In the past, there have been eye popping rises and sharp declines. Yes, one could say that this is pure speculation and gambling with bitcoin. It is similar to the Wild West days, where there was uncertainty as to the validity of bitcoin. Can it really be trusted? It is all hot air? But there is a fear of missing out, so let’s speculate and buy it!
But this could be said for share trading as well. Any market is open to mass speculation, and investors will purchase as a group if there is momentum or flee if there is something that triggers an exit. Share prices are also open to inside trading, manipulation and fraud. So, do not think, that bitcoin is more or less speculative than other assets such as shares and equities.
Is the risk the same as gambling? Perhaps so, if you consider share trading also gambling. But remember, that are many investors in the stock market, so it must be safer than going to the casino.
Is bitcoin becoming a market bubble? This is a very difficult question to answer. Intrinsically bitcoin has no value, but the same can be said of a Louis Vuitton bag vs a plastic bag. Value is in the eye of the beholder, and bitcoin has a threshold inbuilt that can be mined, meaning there is limited supply.
As bitcoin becomes more entrenched in the mainstream finance ecosystem, bitcoin will continue to rise. As to how much and how quickly is anyone’s guess.
The bitcoin market is gradually maturing, as can be seen with the acceptance of PayPal as a means of payment and storage. The maturing of the market, will lead to many inherent benefit. These benefits will correlate mostly to typical market behavior, such as geo-political regulation, exchange trust and reliability, market supply and demand.
The increase liquidity and volume of trade is enhancing the reputation of bitcoin as a viable investment asset. Its digital nature brings forth characteristics that other investment assets do not offer.