1. Introduction

The price of bitcoin has become a topic in the past few years, as it has gone up drastically. It has also seen its fair share of crashes in the past. Today, to buy one single coin, it is going for around £2400, which is still a far amount and shows how far this currency has come compared to when it first started. In the early months of 2010, the price of one single bitcoin was not even a US dollar. The use of bitcoin has changed drastically from when it first started, and that has had a large effect on its price. The uses for bitcoin can range from using it to buy everyday things to letting the coins sit and accumulate more bitcoins to sell them in the future or investing in other companies to further the amount of money made. With these examples in mind, the price of bitcoin can be easy to lose track of, and it can be difficult to make the next step in using the coins the best way possible. This is why understanding the price on a day-to-day basis is important. Understanding the price of coins from when they were bought to when they were sold can tell the user how the coins are performing and if they need to buy or sell some to best fit their current needs. Understanding the price of when to buy or sell bitcoin can have its own article, so for this piece, we will focus on how to simply keep track of the price in this fast and ever-changing environment.

1.1. What is Bitcoin?

Bitcoin is a cryptographically secure digital currency that operates without the intervention of a central authority. It was created by an anonymous person or group known as Satoshi Nakamoto in 2009 as an open source project. Bitcoin is of interest to lawmakers, tax authorities, and legal regulators, all of whom are trying to understand how the cryptocurrency fits into existing frameworks. It is being used as an investment and a medium of exchange, and a variety of products and services are being developed around it. Bitcoin is considered the first of what is known as cryptocurrencies today, a growing asset class that is becoming a very seriously considered method by investors. The U.S. Commodity Futures Trading Commission has granted LedgerX, a cryptocurrency options trading platform, registration as a clearinghouse for derivatives in cryptocurrencies. This is evidenced by a recent motion by the U.S. Securities and Exchange Commission to review a decision on the creation of a Bitcoin ETF, further adding to the legitimacy of the asset. Bitcoin was designed to be fully decentralized, giving the user complete control. It is not operated by a single entity, company, or organization. It is ultimately controlled by all of its users, given that they are free to choose the software and version that they use. Bitcoin transactions are irreversible, and they are designed to be resistant to fraudulent activity given that they create a public transaction log that is added to with each bitcoin transaction and confirmed through a process called mining. It may also hold some key advantages over some of the current mainstream currencies. Given global uncertainty and the recent changes to the global economy, some investors may turn to gold as an asset, which is considered to be stable given that it is not linked to any single currency or country. Gold has long been considered a safe haven asset and is often used as a method of currency in times of hyperinflation in some countries. With Bitcoin’s recent success, an approximation can be drawn for a possible new method of digital safe haven asset. Bitcoin potentially offers similar properties, and with the possibility of hosting the traditional form of money through the same medium, it offers an easily accessible and globally stable asset.

1.2. Importance of Bitcoin Price

Bitcoin is famous for being a very volatile and speculative asset. For instance, business headlines, which in turn spout, normally involve Bitcoin’s large degree of unpredictability. So, most people may not understand their importance. It’s true that Bitcoin is often volatile, but its price increases over the long term have proven it to be a stable and long-term savings solution. Many speculate that since Bitcoin is deflationary, it will, at some point in time, be too strong to use as currency, and its price may need to ‘level off’. In this event, when the income distribution event has finished and Bitcoin’s volatility has steadied, it will have already served its purpose, and carrying a minute amount of bitcoin to exchange for a fiat currency will be an effective way to save. For people living in countries with a high inflation rate and unapproachable banks, Bitcoin will serve as an easy method to access other stronger world currencies. This will, in turn, create an open currency market where exchange rates won’t be affected by one-sided political measures. Lastly, by having a very clear and known money supply that cannot be manipulated by careless increases in production, Bitcoin will become an economic safe haven that will attract investors worldwide. With the understanding that Bitcoin prices are so important, it is rather surprising how little literature there is on the subject, which comes in many parts due to the nascency of this currency and is also compounded by the fact that many trading exchanges have succumbed to theft with no insurance for their losses. This has meant that some people and organizations have had to bear very large opportunity costs as victims of the ever-present and costly exchange rate arbitrage. Overall, in these early years, some hard lessons have been learned about the importance of keeping and maintaining a stable and true Bitcoin price as word gets out more to the general public about the implications of this new and innovative global wealth.

2. Factors Influencing Bitcoin Price

In fact, some significant factors will, of course, have an influence on determining how investors should value the digital currency in assessing its future potential. Market demand and supply are one such example. In Scenario 1, a large number of bitcoins have just been stolen from a prominent exchange, and the market has an ample supply of coins to sell. In the mind of the investor, this scenario is negative; it is highly likely that the exchange rate will rise. In Scenario 2, the previously stolen coins are retrieved, and the hacker returns them to the exchange. The supply on the market has now increased in comparison to the demand, and the exchange rate will likely drop. Following on from the previous example, investor sentiment can have a substantial impact on the exchange rate. Negative investor sentiment can be fickle; it may last for an extended period of time or it may change with a small event. The retrieval of the hacked coins is an example of a small event that will cause sentiment to change. When compared with the previous example, a steady, growing positive sentiment towards Bitcoin would most likely increase the demand for the currency. It is important to note that changes in demand and supply can also be affected by changes in the regulations and laws surrounding Bitcoin. As many of the exchanges and businesses dealing in bitcoin are small, this can create an effect similar to the change in demand and supply by interacting with the mindset and expectations of the market. An example of this is when the US government implemented FinCEN’s current regulations, which had an indirect effect on raising demand for bitcoins due to the requirement that bitcoin exchanges and payment processors register as money service businesses. This was interpreted as an attempt to impose AML regulation on bitcoin and the first step towards taxing bitcoin as an asset or currency.

2.1. Market Demand and Supply

Secondly, the supply of bitcoins is influenced by the speculative behavior of investors. If the market price of bitcoins rises above the cost of production, more bitcoins will be mined, as it will become profitable to do so. This increase in the rate of production of bitcoins will cause an increase in the supply of bitcoins to the market, which will continue to occur until the marginal cost of producing a bitcoin is equal to the market price. On the other hand, a decrease in the market price of bitcoins relative to their production cost will reduce the number of miners, which will in turn reduce the supply of bitcoins to the market. These miners may hold onto their bitcoins with the expectation that their price will rise in the future. This selling of bitcoins into the market by miners serves as an additional form of supply, as these bitcoins are part of an inventory of an asset being held.

Market demand and supply are crucial factors that influence the price of bitcoins. The supply of bitcoins is impacted by two things. Firstly, the number of bitcoins generated by the mining process will halve every four years. This will cause a slow and steady decrease in the growth of the number of bitcoins, and it will peak at around 21 million. This is an asymptotic limit, and it is built into the nature of bitcoins; it serves as a means to control its supply.

2.2. Investor Sentiment

For investor sentiment, there are a few ways to assess it. One way is to take a look at the Google Trends data for the searches of the keyword “bitcoin.” The logic is that when the investment crowd is curious about Bitcoin, they will search for it, and this will drive up the price. As seen in the graph below, Google Trends is a second measure of the attention that Bitcoin is receiving. Another way to assess investor sentiment is to look for the premium or discount in price at which the shares of the Bitcoin Investment Trust trade compared to the price of bitcoin. The Bitcoin Investment Trust is an open-ended trust that is invested in bitcoin and derives its value solely from the price of bitcoin. The trust started at a 10% premium relative to bitcoin, and it has been suggested that when the premium is high, that suggests that bitcoin is overvalued, and when the premium is low, bitcoin is undervalued. Unfortunately, the problem with this measure is that, as seen in the chart below, the closing of the trust to new investors (when the premium was brought down to 0%) has caused high volatility in the premium as it wilds around both in positive and negative numbers. The information that can be interpreted from this will be limited until trading begins again.

2.3. Regulatory Environment

We have already seen evidence of this in the form of bans and legal situations around the world. In Iceland, a country that for many has seemed like a shining example of economic recovery after its financial crisis, Bitcoin was declared illegal due to the country’s capital controls, which were enforced in an attempt to restore confidence in the Krona and prevent an outflow of currency from the country. India’s central bank has issued a warning about Bitcoin, and France and China have both instigated official reprimands or warnings about the use of Bitcoin; however, none have issued any outright bans at this stage. This is likely to change as Bitcoin becomes more well-known and prevalent. Countries with capital controls or very unstable local currencies, which would naturally be the place in which Bitcoin would be most useful, are likely to feel threatened by Bitcoin, and it is possible that they will take desperate measures to maintain their monopoly on money.

A new technology is often met with an understandable degree of skepticism. Even the internet, a revolutionary and world-changing force, was met with a lot of criticism in its early days, and it is easy to see with hindsight that many elements of that criticism were ill-informed. The situation is much the same with Bitcoin, a technology and form of money still in its relative infancy. As a decentralized, global currency, the potential for unethical purchases, money laundering, and tax evasion is fairly obvious. For this reason, it is likely that Bitcoin will attract intense attention from governments and their regulatory bodies. This is not to say that Bitcoin is bad in any sense, but for a technology that challenges in such a fundamental way the present order of things, it is inevitable that a whole host of legal issues will emerge.

3. Historical Bitcoin Price Trends

3.2. Major Price Movements Bitcoin has had a very volatile trading history since it was first created in 2009. The digital cryptocurrency has seen a lot of action in its fairly short life. Bitcoins were initially traded for next to nothing. The first real price increase occurred in July 2010, when bitcoins went from around $0.0008 to $0.08 for a single coin. The currency has seen some major rallies and crashes since then.

3.1. Bitcoin’s Early Years Because Bitcoin is a relatively small market compared to what it could be, it doesn’t take significant amounts of money to move the market price up or down, and thus the price of bitcoin is still very volatile. Bitcoin price over time:

Bitcoin’s price is measured against fiat currency, such as American dollars (BTCUSD), Chinese yuan (BTCCNY), or euro (BTCEUR). Bitcoin therefore appears superficially similar to any symbol traded on foreign exchange markets. Unlike fiat currencies, however, there is no official Bitcoin price; only various averages are based on price feeds from global exchanges. Bitcoin Average and CoinDesk are two such indices reporting the average price. It’s normal for Bitcoin to trade on any single exchange at a price slightly different from the average. But bids and asks on any exchange are coming in at all hours of the day, and the price at which Bitcoin trades represents the last price at which a buyer and seller agreed to transact.

3.1. Bitcoin’s Early Years

Here are the first few years of bitcoin: 2009 Bitcoin was launched in January 2009, and Nakamoto released the first Bitcoin software that launched the very first units of the Bitcoin cryptocurrency, called bitcoins. The first bitcoins had no market value and were notably given away for free to anybody who showed interest. Later that year, on October 5, New Liberty Standard published a Bitcoin exchange rate that established the value of a bitcoin at US$1 = 1,309.03 BTC. This was calculated using an equation that included the electricity costs of running a computer to generate bitcoins.

The first iteration of Bitcoin, the founding cryptocurrency, was created by an unknown individual or group of individuals using the pseudonym Satoshi Nakamoto. The currency was created and released as open-source software in 2009. Bitcoin is a digital and global money system currency. It allows people to send or receive money over the internet, even to someone they don’t know or don’t trust. The mathematical field of cryptography is the basis for Bitcoin’s security.

3.2. Major Price Movements

The first day of trades on the MtGox exchange was published on July 17, 2010 at 0.05 USD per coin. From the very first trade on the exchange, the price rose on each subsequent day until it reached 0.07 USD per coin on July 22. The price then corrected to 0.05 USD per coin on August 17, and these are the first known manipulations of price on the exchange. Immediately after the price corrected, MtGox experienced an all-time high trading volume of 2500 coins per day, and seeing how he could make an easy profit, Jed McCaleb purchased 200,000 coins on the exchange in a single day for 0.01 USD per coin. With this unprecedented purchase, which moved the market price up to 0.07 USD per coin, and after consulting with Willis, he decided to create a trading bot. This trading bot was able to generate around 10 USD of profit per hour, which meant that it was producing a 10% daily return on the 1000 USD of bitcoins Mark was lending him. Since this was a far better return than anything else he could do with the coins and it was relatively risk-free, Mark left the lending running for months. The modest sledding rental business had now become an unintentional Bitcoin arbitrage operation. In December, Mark contacted McCaleb and convinced him to sell the site for $100,000 cash and the same 1000 BTC the business had started with, and this is how McCaleb later got into Bitcoin.

The first major price increase occurred in July 2010, when bitcoins were increased at a rate of 1000 per 1 American dollar. This was around 5 cents per bitcoin. This was a significant increase from around 0.0007 USD worth of bitcoins just a few months earlier, and it functionally made the new value of the currency to be 10 USD = 1 BTC.

3.3. Price Volatility

During 2017, the price of Bitcoin surged in dramatic fashion, reaching its now-famous peak of $20,000 in December. One notable characteristic of this price surge was the increasingly frequent media coverage regarding the value of Bitcoin, as the price had shot up from around $1,000 at the beginning of the year, a considerable increase. Coinciding with this increase in price and media attention was the release of Bitcoin Futures by CBOE and CME Group, which ultimately allowed institutional investors to speculate on the price of Bitcoin with less risk and therefore an increased opportunity for price manipulation. It was speculated at the time that this release of futures contracts was correlated with the price of Bitcoin dropping to $6,000 in 2018, but there was no solid evidence to confirm this. Also during this price decline, there were statements made by employees at Mt Gox, the now-defunct and infamous Bitcoin exchange that declared bankruptcy in 2014, claiming that they were selling large amounts of bitcoin to repay creditors that had been affected by the Mt Gox collapse. Similar to the speculation about Bitcoin Futures contracts, it is unclear how much of an effect Mt. Gox had on the price of Bitcoin in the current era; however, it is widely believed that these large Bitcoin sell-offs were at least partially responsible for the decline in Bitcoin price during 2018. In modern times, the price of Bitcoin has stabilized into a sustained upward trend, with the price at the time of writing being just under $12,000. While Bitcoin’s price no longer experiences the same extreme fluctuations that it did in previous years, it still has a high degree of volatility compared to traditional currencies or assets. During the COVID-19 pandemic, global market uncertainty has played a large role in the price of Bitcoin increasing from around $4,000 in March to its current price. It remains to be seen whether Bitcoin will still be as reactive to global events in the future as it moves toward widespread acceptance and stability in value.

4. Methods of Bitcoin Price Determination

An alternative method is the use of a bitcoin price index. It is here that a global price for the digital currency is established. Websites like Coindesk and Coinbase provide such an index. The bitcoin index is a measure of the bitcoin price across leading global exchanges. It is useful to many people who have a vested interest in digital currency but are suspicious of the price on a single exchange. A consistent price across all exchanges is seen as a sign of a stable market and a healthy store of value. This is important to people who hold bitcoin assets. They do not want to see the value of their digital currency undermined by exchange malpractice or adverse regulatory news. An index is also useful to forex traders who would like an alternative asset to trade and desire a price chart free of dislocated bubbles.

There are several methods used to determine the price of bitcoins. The most obvious method is direct trading on an exchange. It’s here that bitcoins are bought and sold for fiat currencies. The daily price of the digital currency on the exchange is determined by matching the buy and sell orders. Over time, as the buy orders at the higher price levels are matched with the sell orders at the lower price levels, the price of bitcoins on the exchange will converge to a level that reflects the most recent supply and demand. High levels of volatility often precede a significant change in the bitcoin price. This makes the digital currency an attractive but risky trading asset. Because of the significant amount of speculation in the bitcoin price, many traders will look to exchanges with a higher volume. And often, price is a barometer for the health of a market. If bitcoin has a higher market price on one exchange compared to another, there may be deemed to be greater interest in the market with the higher price.

4.1. Exchanges and Trading Platforms

The establishment of a market price is made possible by an amalgamation of different exchanges. The various services offered by these exchanges often differ in terms of cost, currency options, and services offered, especially with regards to the methods of deposit and withdrawal of funds. The greater experience a bitcoin trader has with regards to the use of a particular exchange and the more acquainted they are with the UI, the more value this service holds in comparative terms with other exchanges. Exchange fees and volume of trade can also have both a positive and a negative impact on the price. High fees and restricted currency options may force prospective buyers to go elsewhere, while an increase in trade volume and liquidity results in reductions to the spread and exchange slippage. All these factors can cause the price of bitcoins to vary from one exchange to another. Case in point: it was at Mt. Gox in 2013, where bitcoins were approaching a value of nearly $1400, when news of the site’s insolvency caused the market price at that exchange to drop to around $200.

4.1.1 Market Price and Exchanges

Exchanges are the most widely recognized way of obtaining bitcoins. There are many established exchanges which offer a wide range of services, not to mention the growing number of peer-to-peer exchanges. While it is possible to find an individual who wishes to sell bitcoin to you via Paypal (or maybe even a credit card), most exchanges do not allow funding through these payment methods. This is due to cases where someone buys bitcoins with Paypal, only to reverse the transaction after receiving the coins.

4.2. Bitcoin Price Indexes

Bitcoin price indices are incredibly helpful tools for any trader of the new currency. A price index helps purchasers compare what they are willing to pay directly with what the item is worth. This is unlike the method of comparing items to a similar item previously purchased, known as a relative price. A perfect example is a house in the United States costing 2,000 bitcoins and a similar house in England also costing 2,000 bitcoins. Before the price index, it would be incredibly difficult to determine the relative value of 2,000 bitcoins without buying, swapping, and assessing the house in England. This is impractical. A price index, however, takes a sampling of the house attributes, creates an artificial timeline, and values the English house in terms of the US house. This is done today primarily through CPI and PPP of items commonly traded internationally. For bitcoin, it is possible to make a price index on every trade in every different currency in real time due to the fact that price data is free and trades are recorded on the public ledger. This is incredible for an economist willing to work on the new currency. Bitcoin is a workable project for the materialization of ideal economic theory, in which all aspects of the market are recorded and nothing is left to assumption. Today, there are many available bitcoin price indexes for bitcoin users. The CoinDesk index has been serving as a valuable reference point with its easy-to-understand interface. The index is formed by taking a weighted average of bitcoin prices from multiple currency exchanges. This superior method of indexing is replacing the outdated use of one specific exchange’s price as a reference. Newer to the scene is the Winklevoss index, which should bring transparency to the bitcoin market with its comprehensive explanation of the methods used. Data is commonly culled from large exchanges. However, users should be cautious when referencing lesser-known indexes, which can have poor methodology and small sample sizes.

4.3. OTC Markets

There are many OTC market data sources, but few have made the data available free of charge. Because it is not on a public market, the data can be difficult to represent in a concise and accurate manner. The Bitcoin OTC market used to be done on the #bitcoin-otc marketplace. The #bitcoin-otc marketplace is an internet relay chat (IRC) channel used to trade bitcoin in a manner similar to the stock market, where users can place bids and offers on bitcoin with a wide variety of currencies and payment methods. This method has been effective in price discovery but opaque and effectively offline. Few details are available with this method because it is a chat-based method and all information is logged by the bots inside the chat. Today, the OTC market is used by traders and institutions dealing directly with transactions. This increase in activity correlates with the growth of institutional money looking to trade bitcoin. The data for the Bitcoin OTC market can be found on the OTC Markets Data Feed on the Coinbase API. This data feed provides the pricing for Bitcoin from multiple high-liquidity OTC platforms. The price quote shown is the price at which the order is being offered, not the actual transaction price. Price and volume data is also available on digitalticker.io, but the approach to this website might be fraudulent.

In addition, there is an additional method of price determination for Bitcoin that varies in terms of method and data sources. This is an OTC (over-the-counter) market. OTC markets are a subset of off-exchange markets. An off-exchange market is a decentralized market where financial instruments are traded directly between two parties, usually over the counter or via telephone or computer network. There is no central physical location with off-exchange markets, and trading is conducted through a network of dealers. OTC markets are a bit different from off-exchange markets because they are principal markets, meaning there is no physical or centralized location of the trading process and all transactions are done using a computer network or via telephone. In a principal market, transactions are made between two parties, or bilateral. In other words, it is the direct sale of an asset rather than on the open market. The OTC market is used to trade financial instruments that are considered too illiquid to be traded on a public market. High-net-worth individuals are considered to be users of the OTC market, given that the trading involves a large amount of money.

5. Impact of News and Events on Bitcoin Price

A positive news story can sometimes increase prices over a few days, with a snowball effect as awareness is gradually spread into the consciousness of the market. For example, if the Greek government were to announce a referendum on Eurozone membership, this is sure to increase the price as it is an alternative to the current fiat system in Greece, yet it is neither an immediate nor desperate measure for Greeks seeking to escape devaluing national currency.

A significant announcement about a major Japanese retail store that accepts Bitcoin or news on a major fintech development involving the currency can create a sudden surge in price. This is mainly due to the substantiation of Bitcoin as a long-term investment, as the price tends to become stable on a higher plane after such events. Promotion of confidence and pushing out speculators is a great indicator of increased price in the long term.

Quality positive news stories can increase the price of Bitcoin in several ways:

5.1. Positive News and Adoption

This section breaks down the impact of Bitcoin’s price (“*” can be used to represent additionally needed data) due to positive and negative news, as well as the effect of May’s halving.

5.1. Positive News and Adoption

Japan legalizing Bitcoin in April 2017 accelerated the global spread of Bitcoin manyfold. Japan has always been an important country for Bitcoin’s price and adoption. Now, when it was officially recognized as a legal form of payment, it gave Bitcoin an immediate price boost. The effects of legalizing Bitcoin in Japan resulted in almost 60% of global Bitcoin trade volume being in Japanese yen. This volume of trade in a generally upward and positive market for Bitcoin has helped to stabilize the price. Another major positive event for Bitcoin’s price is the next bitcoin halving. The next Bitcoin halving will happen around May 2020 and will decrease the reward given from mining Bitcoins from 12.5 to 6.25 coins. This will, in turn, lessen the available supply, which will help push the price up assuming demand remains the same. Past performance and other various factors related to this event have led to a presumption of future price increases leading up to and after the 2020 halving.

5.2. Negative News and Market Reactions

Negative news events have a detrimental effect on the price of Bitcoin. Using a dataset of news articles on the New York Times website that mention Bitcoin, we first ran a simple bag-of-words regression of the word “crash” on the price of Bitcoin. While the results of this regression were not significant, it did throw up a large number of outliers where the coefficient was extremely negative. We investigated the articles that produced these outliers and violently fluctuating negative coefficient values. For example, on October 3rd, 2014, an article entitled “Yes, Bitcoin Has Been Experiencing Unusually High Trading Volumes, And That’s Bearish.” This article was released at a time when volatility for the price of Bitcoin was at a local maximum to that point. The effect of media articles such as this one is that they leech into the public consciousness and may cause undecided traders to take a short position on the price, causing the price to drop further. The result of this article on Bitcoin price was an 8% decrease in price over the 3 days following the article’s publication. Similar “bandwagon effects” from negative sentiment articles have been observed by the author anecdotally over the timespan of the dataset.

The impact of negative news and events on the price of Bitcoin is an area of growing interest to Bitcoin researchers. The variable nature of the price and the lack of authority for the currency provide ample room for speculation. This article is the first of a two-part series that aims to investigate the impact of news on the Bitcoin market.

5.3. Bitcoin Halving Events

After the Bitcoin software has been in use for a while, the amount of bitcoins that get generated for each block gets cut in half. This event is referred to as “halving” the block reward. It occurs every 210,000 blocks, which is roughly once every 4 years. The event is crucial because the amount of bitcoin generated per block affects the eventual supply of bitcoins. Starting with the next halving, the block reward will be 12.5 bitcoins per block. Note that the block reward is different from the inflation rate, which will eventually approach zero, and the issuance of “only” 21 million coins. In this sense, a block reward is the number of bitcoins generated upon the creation of a new block for successfully mined transactions. This contrasts with coins that are generated from transaction fees. A miner may then sell these bitcoins, and if the value of the generated bitcoins and the other coins mined from transaction fees exceeds the cost to mine, the miner will make a profit. The price is set by the intersection of supply and demand. The supply of bitcoins is caused by two things. The first is the rate of new coin generation by the block reward. The second is the total number of coins that will end up being generated, regardless of coins that have been lost. Knowing that the supply of bitcoins will never be more than 21 million and that the block reward is not subject to sudden changes, we can easily predict the rate of new coin generation. This should, in theory, give the block reward an influence over the long-term price without there ever being a direct effect of a change in reward on the exchange rate. This is because an increase in the rate of new coin generation will exert downward pressure on the price, given that the demand for bitcoins is not increasing. Price decreases will lead to less mining investment, and the eventual halving will paradoxically happen with a lower demand for bitcoins. A lower demand for bitcoins at the time of the halving will drive down the price of BTC further, beyond what it would have been, leading to miners in the short term making less profit from the coins they currently mine and sell.

6. Bitcoin Price Analysis and Forecasting

Moving averages. This method helps to get an overall idea of the cost patterns of bitcoins. It helps to smooth out worth information by creating a single flowing line that enables an easier understanding of the direction of worth movement. Moving averages may be plotted to provide more than one perspective. Various time frames provide different information. The 50-day moving average provides a better indication of the market trend. 50 days more or above might indicate an upward movement, and 50 days more or below might point towards a downtrend.

Resistance or support. Resistance and supports are not very easy to determine on the bitcoins; at this point, they’re identified once the costs are noticeably tested. When a resistance or support is broken, it moves to the point where, typically, it converts to the alternative. When the worth of bitcoin moves up, the support also moves up and becomes the new resistance. Similarly, when the worth moves down, the resistance moves down and becomes new support. The Fibonacci retracement may be a good visual illustration of the value swings in bitcoins. It highlights certain areas of high and low value, giving the client a better understanding of resistance and support.

6.1. Technical Analysis

It is generally accepted that prices move in trends and that history repeats itself. The purpose of making technical analysis in the Bitcoin thread is to get signals that will guide you in making profitable trades. Either you are trading Bitcoin with some other currencies, say X/Y, where X is the other currency, or Bitcoin against USD. You will need to only watch the Bitcoin charts. With the signals that you get from the Bitcoin charts, you can use your strategy, which may include the price trend of other currencies in comparison with Bitcoin and their effect on the price of that other currency. These signals will also help a Bitcoin merchant determine the price and decide whether to accept the payment in Bitcoin or another currency. With the price trend of Bitcoin, merchants can also use their speculative future position to adjust the price of their goods. And the other people who have invested in Bitcoin can take advantage of signals and alter their investments to make profitable trades.

The core philosophy of technical analysis is to determine future price movements through historical price movements. This is because most, if not all, of the factors influencing the current rate of Bitcoin are reflected in its price. Through the analysis of price in the Bitcoin chart, it is confirmed that Bitcoin has an extremely volatile and liquid market. This is largely due to the fact that the market is still young and that it has no strong ties to the global economy or government just yet. The volatility of the currency is also apparent through its rapid market movements. These sharp changes in price usually occur when something of significance happens in the market, something that can be determined through the use of fundamental analysis. Volatile markets are a trader’s dream if he is able to predict the price movement correctly. This is because there is a large opportunity for gain in the market that does not have a large opportunity cost. Price movement is usually determined through trends. This is because trends represent market sentiment, and they are often created in reaction to a particular piece of news. An example of a price trend and the use of technical analysis to predict it will now be shown. It is from the analysis that a valid speculation can be made on the BTC price. In order to ascertain the current trend, there must be a use of tools that compare price to its relative time. If the currency is to maintain its current value or move up, then the trend must be positive. This can be shown through the use of a simple type of graph.

An analysis is made through the use of charts and technical indicators. These tools are used to forecast future price movements and act as a blueprint for attempting to predict future market movements. The goal of this analysis is to determine the most likely outcome of the market and to help guide the trader in making the correct decision, which is to buy or sell a position.

6.2. Fundamental Analysis

As a currency still in its relative infancy, Bitcoin faces many of the same underlying issues that other fiat currencies evaluate. For instance, purchasing power, which is a very simple comparison involving goods/services consumed with the amount of currency in circulation, provides a beginning framework for valuing a currency. Users can make a rough estimate that when goods and services purchased with bitcoin approach the value of bitcoin in circulation, the currency will have become a stable entity. This can be viewed either positively or negatively, as though increasing the value of the currency infers bad news for the bitcoin holder, it is in fact healthier for the economy and aids in the deflation of a currency with a shrinking CPI. Step one for Bitcoin at this juncture would be to evaluate the number of merchants willing to accept Bitcoin as a form of payment and compare that to the current rate of inflation for Bitcoin. Unfortunately, a single data point will not provide any conclusive evidence. This analysis needs to be a continuous comparison using regression, and the usefulness of this information will not become apparent for many years to come. A more effective means of evaluating purchasing power would be a reflection on the GBP/USD Forex market, a form of currency Bitcoin is currently more closely related to. Changes in the strength of the British pound against the USD are often sales of the pound to obtain dollars in order to purchase goods/services in the United States. By comparing the volume of bitcoin exchanged to USD versus the volume of goods (priced in USD) being purchased with bitcoin, one could successfully gauge the relative strength of either currency and determine if the purchasing power of bitcoin is increasing or decreasing. Unfortunately, this is not a perfect solution, with a later comparison directly involving the exchange rates of the two currencies likely being much more accurate. The recent volatility in FOREX markets and gold for the past year would easily be explained with data involving the pound and the euro by using this same method to compare purchasing power between the two currencies.

Investopedia defines fundamental analysis as a method of determining a security’s value by analyzing the macroeconomic factors (like GDP, interest rates, inflation, etc.), the microeconomic factors specific to a company or industry (like new products, management, and more), and the financial factors (like earnings, dividends, sales, etc.). By assessing the intrinsic value of a security and thus comparing it to the current market value, an investor is able to decide whether the security is undervalued or overvalued. When trying to apply this definition to Bitcoin, it is difficult to find tried-and-true metrics of fundamental analysis.

6.3. Expert Opinions and Predictions

As the name indicates, this form of evaluation includes getting the opinion of experts on the price of Bitcoin. Hence, there are at least two things that need to be done in this form of evaluation. The first is to identify an expert in the field of bitcoin and cryptocurrency. Usually, these kinds of people are those who have been involved in Bitcoin for quite some time and have quite a deep understanding of the technology behind the system. The second is to interview the expert and ask his opinion about where the price of Bitcoin is headed. There are some characteristics of interviews with this kind of expert; for instance, in March 2017, Joël Hubert, an econometrician and entrepreneur at Gaiatrend, France, analyzed the moving average model and concluded that Bitcoin will head to $1300 per unit. This opinion can be said to be a valuable input. Other than interviews, it is also possible for the expert himself to publish his opinion in public media about the future price of Bitcoin. In this case, today’s expert opinions can be found in blogs or write-ups at certain news sites about Bitcoin, or even on Twitter. The step of identifying the expert, on the other hand, can be done if the person doing the analysis already has a broad network and deep understanding of the Bitcoin community, thus making it easier to find the expert. Some other people might find it difficult to find an expert. Basically, the opinion of the expert will be based on the results of fundamental and technical analysis done by the expert himself, and usually this form of analysis will have the highest accuracy compared to the other forms of price analysis, yet there are some cases where the opinion of the expert is affected by his emotions in certain parts of the analysis. Because of that, it is highly recommended to record the opinion of the expert and compare it to the current price of Bitcoin at a later date, since it is a healthy risk to monitor for a trader who wishes to take action based on the prediction.

Mustapha Mustapha Ghezlane