Should You Buy Bitcoin Right Now?
(Originally published on VisArt Blog on January 21, 2015)
Bitcoin’s price took a significant plunge from $314.59 to $263.63 over the New Year 2015 weekend and plummeted again last week below the $200 mark. This is a pretty big deal for current holders, as prices haven’t been this low since late 2013. If you’re unfamiliar with bitcoin’s volatile market and intra-day fluxes, here’s a historical snapshot of the pricing trend from the CoinDesk Pricing Index:
While prices continue to tether just above the $200 line, bitcoin trading volume is on the decline again after a sharp spike. According to traders, the lull in price could garner new adopters for the Bitcoin ecosystem. However, many are still hesitant about the new currency . Using Visart software, we aggregated, visualized, and further synthesized small data from reputable databases to help individuals and SMEs get a better sense of what’s happening with this budding, but disruptive, technology.
Let’s take a closer look at the crypto-currency being deemed — by authors and enthusiasts — the “money of the future”.
First, let’s talk about the intrinsic value of a bitcoin. Unlike the gold and silver-backed, centralized, fiat currencies you’re accustomed to, bitcoin is a decentralized and virtual currency of a p2p network that started in 2009. Basically, it’s internet money. Bitcoins generate via a logarithmic release function set to match gold’s annual mining rate. This means, in the same way that natural law determines the rarity of gold and silver — and subsequently the value of our paper money — an algorithmic code determines bitcoin’s supply rate and scarcity.
Yes, that’s right: in theory, Bitcoin is as valuable as gold. However, bitcoin prices have not been consistent with gold prices since December 2013.
Regulated fiat currencies can inflate for different reasons, as we’ve seen in the past. The bitcoin supply, however, is fixed with all transactions documented and made public record on the market’s ledger — the block chain — for the sake of transparency.
Bitcoin miners distributed around the world maintain the block chain and the flow of the network by rapidly verifying transaction data around the clock. To do this, miners use computing processing power to solve algorithmic puzzles (hash functions) for bundles of transactions, called “blocks”. Miners announce solved, or hashed, blocks (verified transactions) to fellow miners and the general public on the ledger. This protocol helps miners link hashed blocks chronologically (something like a “chain of events”).
It’s a difficult process.
Mining has become increasingly more difficult over time. In exchange for the work performed, miners collect transaction fees and new bitcoins for keeping the network secure.
In terms of end users, purchasing bitcoin is relatively easy: simply sign up for a bitcoin wallet (something like a PayPal account) and exchange fiat money (e.g., USD) for bitcoins at the going rate. With bitcoin in your wallet, you have two options: (1) send money to anyone, anywhere in the world with a wallet and/or (2) purchase goods from online market places/brick-and-mortar retailers that accept bitcoin. Microsoft recently became a bitcoin merchant, for example.
So, why aren’t more people using bitcoin? Despite circulating research and literature, popular perception (driven by bad press) has it that bitcoin is unstable. Why is Bitcoin pricing so volatile? Besides there being no future market (yet), there are a number of reasons circulating. Based on some data discovery done on the web, here’s a little insight:
1. Low bitcoin mining volume:
Simply put, there are more dollars (and other fiat currencies) than bitcoins circulating around, though market capitalization has increased quite a bit in a short amount of time. More bitcoin miners would need to get the necessary hardware, software, and network of miners (“mining pool”) to increase volume. However, the overhead costs of mining get pretty steep and yield low margins. Here’s a chart of total bitcoins mined over time:
CHART: Volume of mined bitcoin to date
VIEW MORE: Data dashboard on bitcoin mining
2. Low (but rising) bitcoin transaction volume:
Every exchange transaction (meaning, every time a person or entity exchanges fiat currency for bitcoin) drives the price up (even if, ever-so-slightly). If the number of transactions spike, this usually has a positive effect on the trade-price.
CHART: Daily Bitcoin transaction volume, grouped by year
VIEW MORE: Data Dashboard on Bitcoin Market
3. Not Enough Infrastructure Support
Bitcoin infrastructure support — merchant/population ratio, number of active BTMs, etc. — can be a strong indication of the demand for Bitcoin in a given area or country. So far, the United States and Canada are leading the pack of top 10 ranking countries in bitcoin infrastructure support. Still, in terms of liquidity and wide-scale intercultural adoption, bitcoin ecosystems remain nascent.
MAP: Number of Merchants in top 10 ranked countries for Bitcoin Infrastructure Support
CHART: Merchant-to-Population ratio in top 10 countries for BTC Infrastructure
Is NOW a good time to buy bitcoin?
It’s hard to tell.
Despite public perception and periodic “flash crashes”, contingents are hopeful that the recent bitcoin plunge will give buyer’s an advantage in the weeks to come. Often times, stock market traders use on-balance volume (alongside stark differences in closing prices and trading volume) to predict price movement on commodities and determine market advantage. The same can be done with bitcoin.
Applying the logic of on-balance volume, we used a DAX formula to tally the number of hypothetical “up volume” days (raise in closing price) verses “down volume” days (negative change in closing price) in the data:
CHART: Bitcoin Performance Metrics from 2010 to 2014
Going with the theory of on-balance volume, now should be a prime example of a buyers’ market (considering the low prices, high trading volume, or “capitulation” scenario that recently occurred), though day-to-day context plays a major part in price fluctuation, as well. Many bitcoin enthusiasts are shifting the focus of conversation from store of value to means of payment, related stocks opportunities, and bulldogging for application innovation that can uplift the third world.
Please note: in no way does this light synthesis of bitcoin constitute sound financial advice on investing. Only time will tell if prices can recover, or if bitcoin is here to stay.
VIEW MORE: Data Dashboard on Bitcoin Pricing
Originally published at www.visart.io on January 21, 2015.