Why Bitcoin at $1000 is irrelevant.

From Reddit User voiceinthevoid

Click Here for the original post on Reddit.

The first major bitcoin bubble started on October 3rd, 2010, when BTC was priced at $0.06. Fears of ponzi schemes and other things led the price to crash down to $0.01, and a massive selloff and buying frenzy started. In a period of two days, the psychological barrier of $0.10 was breached, and the price was pushed further up to $0.30 before hitting a plateau. In a very short period of time, many people made 5x their money.

The next psychological barrier, of $1.00, was hit a month later, as people were still rallying. It hovered around $1.00 for 2 months, as people were unsure what was to happen next, and many people BTC was overpriced. By April of 2011, this uncertainty had caused an erosion in the marketplace, and bitcoin was down to $0.75. Many people who had missed out on the $1 boat saw this as an opportunity to buy in, and the prices skyrocketed. In 2 months time, the price had peaked at $30. This cause a massive sell off, mostly from people who had thousands of BTC from the pre $0.06 days, and over the course of the next 6 months BTC slowly went down to only being worth $2.25. This was the first big selloff and a many first adopters ended up cashing out in this 6 month downtrend.

In just over a year, bitcoin had gone from $0.06 to $30 and back down to $2.50. For those who bought in at $0.01 and sold at $30, they saw a 3000 fold return on their investment.

The second major bitcoin bubble was significantly less intense than the first. It started in February of 2013 when the previous all time high of $30, of the April 2011 bubble, was breached. To be fair, the value of BTC had slowly been gaining steam, but as that psychological barrier of $30 was reached, a sudden upwards trend occurred. By the end of March 2013, just a month in, the $100 barrier was breached, buying increased even further, pushing the price up to just shy of $270 by the beginning of April. People started to sell, in order to realize their gains, and a panic ensued, in which the price dropped down to a low of $50 within the span of a week.

In this bubble, many of the second wave adopters ended up cashing out. For those that bought in at or around $30 and sold at the peak, they saw a 8-9 fold return. Pretty insignificant compared to the 500x return of the previous major bubble. What is significant about this second bubble, is right after the crash down to $50 there was a surge back up to $140, which subsequently mini crashed. This is significant because that number, $140, was the telltale sign of when the next bubble was to start.

The third major bitcoin bubble is occurring right now, in November of 2013. In the time between the last bubble and now, the price of bitcoin has fluctuated, but stayed well within the extremes of the peak and trough of the April bubble. The November 2013 bubble almost started in August of 2013, when the peak of $140 was reached. It did not occur though, because there was a selloff from those who bought in at the April 20th 2013 post crash rebound. Not even two weeks later, $140 was tested again, and there was a selloff again, although not as much as just a few weeks earlier. This caused a newfound stability as people learned to trust BTC again. By the end of September 2013 $140 was tested again and there was a selloff, primarily by those who has bought in at the last two $140 tests, and those who believed that $140 was now a hard ceiling that was never going to be breached. The selloff rebounded though, and a few days of utter stability just under $140 was seen, which was enough to convince people that $140 was not a hard ceiling at all. This eased peoples minds, and they began to buy. In two weeks time, the price was in the $220 region, and many people, remembering the prior bubble, sold, temporarily driving the price down, but in less than 2 weeks the price recovered, and this also gave people a huge trust that the price was going to continue upwards.

Somewhere around $400, China got involved, and all hell broke loose. In just a weeks time, we had gone from $400 to $800, which caused a selloff panic driving the price down to $450 in just one day. This was just a minor hiccup thought, and the rally continued upwards, and in just 1 week it broke the psychological barrier of $1000.

Nobody knows what’s going to happen next.

No one has a crystal ball, and past performance is no indicator of future performance. Yet if we look at the previous major bubbles, what we see is that in no case is the breaking of a psychological barrier the reason for a selloff. Selloffs happen when that barrier is broken in such an intense way as to render it meaningless and abstract. Selloffs happen when multiple psychological barriers are broken in quick succession. They happen when there is a period for many people to make double, triple, or 10x their money in return in a short period of time. As time passes, the investment needed to double or triple or make 10x your money gets much steeper. This is the reason why we will never see the types of bubbles as the first two historical bubbles ever again. The first bubble had a huge volumetric selloff due to cheap coin. The second bubble had volume because the period of time between the first two bubbles had stability for long enough (3 years) plus a positive ROI on mining to create a volume.

This bubble is different though.

There is a much higher dispersion of coins due to more people involved in mining, and there has also been less time for buyers to accumulate coins. The value of coins has gone up, but the number that people are playing with has dropped significantly. If we compare bubble to bubble, log style, then the current rally we are in, is only about halfway to the peak of the rally that caused the April 2013 bubble. The psychological barrier of $1000 is about as meaningful to us now as the psychological barrier, of $100, was to the April bubble — which is to say it’s having no effect on stopping anything.

China being involved puts a whole new spin on things.

No longer is $1000 any sort of psychological barrier, as they are looking at the price in their own currency. Certainly 8888 is the big psychological barrier for them, but they are also buying BTC not for speculative reasons, but as a store of wealth that is outside the influence of their own government.

I think this rally will continue for a long time, relatively speaking. I think we will see $2000 and $3000 broken before the madness sets in, which will cause the selloff. But even then, post selloff, I doubt we will be under $2000.

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