Bitcoin Trading Alert originally published on May 26, 2014, 8:42 AM:
In short: we don't support any short-term positions in the Bitcoin market.
We frequently repeat that it is hard to exactly pinpoint what's behind a given price move. While some reasons given by the media might have merit, in most of the cases claiming that "Bitcoin moved because X" (plug whatever you want for X) might not be warranted. This is probably done for the sake of a "good story" but does not have to have much to do with actual reasons for the price fluctuations.
At times, these fluctuations might simply be random. At other times the reason behind them might be hidden from our eyes and from the eyes of the reporters posting various kinds of analyses on media websites.
Take for example the exorbitant rise in the value of Bitcoin in November last year. Recall what was written about the "reasons" for that at the time. "Demand from China," "possibility of positive government response in the U.S." or "breaking of ties with Silk Road" were all cited as the possible drivers of the surge in price which brought Bitcoin as high as to the $1,200 territory.
As it turns out, these "reasons" might have actually contributed a lot less to the wild rise of Bitcoin than it was claimed at that time. An extremely curious report was released yesterday under the title "The Willy Report". Its author analyzed trading log data from Mt. Gox and came to the unsettling conclusion that the exchange rate at Mt. Gox might have been artificially propped up. More than that, it might also be possible that the unimaginable rallies of April and November 2013 could be attributed to trading bots (specific programs designed to trade in an automatic manner). Our fair warning is that all of the analysis in "The Willy Report" is highly speculative and there's no actual proof of any wrongdoing on the part of Mt. Gox. However, the data, as it is analyzed, seems at least puzzling.
Without getting into too many technical details, it would seem that special programs were active on Mt. Gox. These programs would trade according to pre-determined rules and had specific characteristics which distinguished them from regular customer accounts. For instance, they would have different ID numbers in the database or wouldn't pay fees.
Based on these distinguishing features, the author of "The Willy Report" compiled reports on the trading activities of the accounts they suspected to be actually trading bots. As it turned out, these "suspect" accounts had been buying Bitcoin, and buying it heavily without selling much of what they had bought.
The author comes to the conclusion that these bots might have artificially led to an explosion in price in November 2013 and possibly April 2013. Now comes the really interesting part. The author of the report added up the amounts bought by two bots, who they dubbed "Willy" and "Markus." Willy bought around BTC270,000, Markus around BTC300,000 and then Willy added another BTC80,000. This totals BTC650,000, which the author describes as "suspiciously close to the supposedly lost ~650,000 BTC."
Is it possible that the bitcoins lost at Mt. Gox are tied to these suspicious buying patterns? Again, this is pure speculation and no actual proof has been seen. However, this analysis would provide an interesting point to clear up for the official investigation in Japan.
Now, let's turn to the charts.
Bitcoin paused on Friday and Saturday, only to resume the rally on Sunday. The volume yesterday was relatively high (almost BTC20,000) and the exchange rate moved 8.6% up. With this move, the currency came closer to the $600 area, a level it hasn't crossed since March 21.
Today, the exchange rate has also gone up, 2.1% (this is written before 8:00 a.m. EDT). The volume is weaker than yesterday but still a lot can happen during this day. Our take on the current show of strength is that it reads different than the rallies we've seen in the recent past. First of all, it didn't start right after a period of falling prices but rather after a period of stagnation. Does this mean that this might change the current outlook? It might be bullish for the short-term, particularly if Bitcoin breaks above $600 but a correction would be expected after the recent period of growth and there's still possibility that this is just a counter-trend rally.
Consequently, we would like to see both a close above $600 and a corrective downswing before considering long speculative positions.
On the long-term BTC-e chart we see that the current rally is very much unlike the two most recent ones (all marked in grey). We've seen a strong move up after a period of calmness while in the previous cases a move up came after depreciation.
Because of this, the bearish short-term outlook is weakened at this time. We don't see the recent move as a start of a new strong long-term uptrend just yet. There's still the possibility that the price will remain below $600 or come back below this level following a break above it. For now, we are still inclined to bet on the currency retreating to $500 but a move above $600 confirmed by Bitcoin staying above this level could have a bullish impact on the outlook. The jury is still out on this one.
Summing up, in our opinion no short-term positions should be kept in the Bitcoin market now.
Trading position (short-term, our opinion): no positions. A move above $600 might have bullish implications if Bitcoin stays above this level.
Regards,
