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Bitcoin’s roaring future

Many in the financial markets would be familiar with Marc Andreessen, given he currently serves on the boards of Facebook, eBay and Hewlett-Packard. His private equity group has helped some of the world’s most exciting firms take off.

Bitcoin

He is already something of a legend in the innovative circles of the world wide web community. Bitcoin fans will also know him as a true believer in the crypto-currency and someone who is prepared to back his positive stance on its future, taking an ever-growing position.

He recently said, ‘if we had bitcoin 20 years ago, it would be the fabric of the internet today’, while adding ‘I think bitcoin is so revolutionary, that if there were a Nobel Prize for technology, bitcoin should win it’. Certainly, there are many out there who share Mr Andreessen’s view – most of those who understand the technology behind bitcoin would wholeheartedly agree.

Marc Andreessen is not the only investor to feel bitcoin has a roaring future. Raoul Pal – a former macro fund manager and author of the Global Macro Investor Newsletter – is also extremely bullish, to the extent of even being prepared to put a quantitative number to his view. According to Mr Pal, bitcoin is worth $100,000, giving a potential 268 times to be made on any initial investment at the current USD spot price. Of course, this is just one view.

Price action, however, doesn’t currently suggest a move to $100,000 is going to happen anytime soon, perhaps more closely mirroring JP Morgan CEO Jamie Dimon’s or Warren Buffet’s much more pessimistic view. Technically, the 20-day moving average (currently at $363) is moving perfectly sideways, so I would personally be looking at playing the Bollinger Bands (ie two standard deviations either side of the 20-day moving average) and trading a range of $414 to $312 for now. However, despite the average true range (ATR) falling of late, volatility in bitcoin could increase in the coming weeks – the highly anticipated 4 December auction of 50,000 coins by the US Marshals Service is now firmly in focus.

Many are sceptical of using technical analysis for trading bitcoin, but I believe technical analysis is still perfectly valid – it highlights supply and demand just as clearly as any chart in the capital markets. It’s even possible that, because the news flow, volatility, liquidity and the rationale behind price moves are so different from traditionally traded asset classes, technical analysis could play an even greater role in risk management. Also, breakouts and subsequent trends (a series of higher highs and lows, or lower highs and lows) would highlight sentiment much more clearly in this market. As we have seen over the years, the trends in bitcoin can be very powerful when everyone thinks as a collective unit.

Many will remember 27 June, when the US Marshals Service auctioned off 30,000 bitcoins it had seized after shutting down the Silk Road marketplace. To put this into perspective, this had a nominal value of just under $20 million at the time. Despite 45 bidders and 63 actual bids, only one individual – venture capitalist Tim Draper – picked up the all the coins. The irony here is that, after much speculation about how high those bidding could drive the price, no one actually found out what Mr Draper actually paid. What we do know is the price of bitcoin is 45% lower than on 27 June, so it’s hard to imagine he is anything other than deeply out of the money.

Much seems to have already changed in the world of bitcoin since 27 June and new funds have emerged, as many of the existing players evolve their understanding and sophistication. Tim Draper clearly shares a similar view to that of Marc Andreessen or Raoul Pal and has already said he will take part in the 4 December auction. The likelihood of Mr Draper picking up all 50,000 coins seems unlikely this time around, so the prospect of much more aggressive bidding seems high. Could this be the catalyst that will drive bitcoin out of sideways trade? Or will the price mirror that of July and head sharply lower over the coming weeks?

It seems to me that we should see a significant increase from the prior 45 bidders, so it could be a really interesting event, especially if the market feels these participants are keen to pay a premium for the coins.

What we do know, though, is the price of bitcoin is predominately driven by headlines in the media, with traders taking a directional bias based on how positive or negative the commentary is. This seems obvious and naturally logical. But, given many see bitcoin as a viable long-term replacement for traditional fiat currencies, the fact that such things as central bank policy, global capital flows, hedging, reserve manager diversification, recycling, bond and equity market influences matter little, life is a lot more simple.

So, if media headline risk is the key driver, then bitcoin could have an especially bright future for retail traders, who would be naturally enthused by the limited inputs that contribute to price moves. Especially as the sophistication behind the technology offered to traders seems to be improving every day.

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