Talking about the correct way to trade Bitcoin, what determines the price of Bitcoin?

The Bitcoin market has been calm recently. Since the Bitfinex exchange was hacked, the price of Bitcoin has remained at around 4,000 yuan. So Martians need to answer the eternal questions in the Bitcoin circle: Why does it rise? Why does it fall? Why does it go sideways? In fact, the essence of this question is to ask what determines the price of Bitcoin. Martians once wrote an article "The Mysterious Formula Behind the Price of Bitcoin". Is this formula still valid today? When it comes to the price of Bitcoin, the people who care most about the price of the currency are obviously Bitcoin traders. Martians have written "Bitcoin Investment: Long-term" and "Bitcoin Investment: Short-term". Interested friends may wish to read them. In this article, we will not talk about the bright prospects of blockchain decentralized technology, nor the great dream of Bitcoin as a global universal currency. With more sincerity and less routine, Martians will talk about the correct posture for speculating in Bitcoin.

Event-driven

Most of the time, the Bitcoin market is calm, and drastic price fluctuations often occur in a short period of time. In fact, it is not just Bitcoin, most of the trading objects in financial asset exchanges have similar characteristics. Since the market value of Bitcoin is still relatively small, its price is more susceptible to external events. Take the two ups and downs this year as an example: due to the halving of Bitcoin mining output, the price of Bitcoin rose by 50% from July 1 to July 10; and because the largest Bitcoin dollar exchange Bitfinex was hacked and 120,000 Bitcoins were stolen, the price of Bitcoin fell by 25% in the next six days.

If we look at the impact of external events on Bitcoin prices over a longer time frame, the conclusion will be clearer. First, let's look at China: In December 2013, the People's Bank of China and five other ministries and commissions issued a "Notice on Preventing Bitcoin Risks", stating that Bitcoin is not a real currency. Bitcoin fell 35% in one day; in October 2013, Taobao sellers began to accept Bitcoin payments, and Baidu launched the first service that supports Bitcoin payments. Influenced by this news, Bitcoin rose nearly 10 times in the following two months.

The rest of the story belongs to foreign people: Japan - In February 2014, the world's largest Bitcoin exchange Mt Gox ceased operations, and the price of Bitcoin plummeted by 50%. The exchange has not been able to resume operations since then; the United States - In November 2013, the U.S. Department of Justice, the Securities and Exchange Commission and the Federal Reserve all recognized Bitcoin as a legal financial instrument, and Bitcoin rose 20% that day; Europe - In April 2013, Cyprus suffered a financial crisis, and bank depositors faced serious losses. Bitcoin completed a 130% increase that month.

The above examples are enough to show that Bitcoin is an investment product that relies heavily on event-driven investment.

Event Type

Regarding the impact of various events on Bitcoin prices, Martians roughly divide such events into four types.

Political events: Most of these events involve the government's attitude towards Bitcoin, such as the Federal Reserve's recognition of Bitcoin as a financial instrument, Germany's recognition of Bitcoin as a currency, China's prohibition of financial institutions from participating in Bitcoin transactions, and Russia's prohibition of using Bitcoin and participating in Bitcoin mining. Although Bitcoin itself is a neutral technology that is not affected by politics, the price of Bitcoin will fluctuate violently due to such events. So far, this is the factor that has the greatest impact on the price of Bitcoin.

Exchange incidents: Although Bitcoin is a decentralized currency, Bitcoin transactions mainly occur in centralized exchanges. Since the birth of Bitcoin, many exchanges have experienced Bitcoin thefts, such as the largest Japanese exchange Mt Gox, which lost 700,000 Bitcoins, the recent Hong Kong exchange Bitfinex, which lost 120,000 Bitcoins, and the Slovenian Bitcoin exchange Bitstamp was attacked and lost 19,000 Bitcoins. Whenever such incidents occur, the risk of Bitcoin transactions increases sharply, and Bitcoin often also sees a large drop.

Financial events: Such events often come from the instability of the real financial world, such as the default of the Central Bank of Cyprus, which caused the savings of depositors in the country exceeding 100,000 euros to be reduced to zero, and Ukraine faced war pressure and suffered a serious devaluation of its currency. Another example is Brexit, which weakened the stability of the euro zone. As a safe-haven asset, Bitcoin is gaining more and more market recognition. At present, the global Bitcoin trading volume has exceeded the trading volume of gold ETFs, and the instability of legal currencies has created the driving force for Bitcoin's continued rise.

Technical events: As a decentralized open source network protocol, Bitcoin's code is far from perfect. The Bitcoin protocol has experienced several crises. For example, a Bitcoin protocol upgrade was not unanimously recognized by the entire network, and the double-spending problem occurred. The scalability of Bitcoin transactions made it easy for hackers to attack and steal, and once forced several Bitcoin exchanges to suspend transactions. As for the recent fierce debate on capacity expansion in the Bitcoin community, no effective solution has been found, which has also cast a shadow on the future of Bitcoin. Whether the Bitcoin protocol can continue to evolve will have a long-term impact on the price of Bitcoin.

Event Outlook

Almost three quarters of 2016 has passed. Will the price of Bitcoin have a surprising performance in the few days left? Martians think it is entirely possible. There are several black swans hovering in the global financial market. Once the crisis breaks out, Bitcoin will have another event-driven opportunity.

Italy's exit from the EU: In order to promote the reform of the legislative process, Italian Prime Minister Renzi decided that Italy will hold a referendum in mid-October. At present, Italy's total public debt has exceeded that of Germany, and Italy is very likely to become the "second Greece" in the euro zone. As a major country in the euro zone, Italy has a great influence on the entire southern European economy. The Italian constitutional reform referendum to be held in October is even more important than the UK's Brexit referendum.

Trump takes office: Facing the upcoming US election, traders are on high alert. If Trump takes office and implements his current ruling ideas, it will have a serious impact on the global economy. Trump's xenophobia and anti-Muslim tendencies will lead to tensions between the United States and neighboring countries and Muslim countries; Trump supports trade wars and advocates listing China as a currency manipulator, which may even cause China's GDP to fall by 7%; Trump promised to replace Federal Reserve Chairman Yellen after taking office, which makes the Federal Reserve's dollar policy face great uncertainty... Deutsche Bank's collapse: Deutsche Bank, the largest bank in Europe, is on the verge of bankruptcy. Deutsche Bank has just received a $14 billion fine notice from the US Treasury Department, and once the fine takes effect, Deutsche Bank may go bankrupt directly. Deutsche Bank's stock has fallen by about 60% in the past year, and its current market value is less than 20 billion euros, which is only one-third of its net assets. Deutsche Bank's net assets seem huge, but as long as its liabilities change slightly, its net assets may be completely wiped out.

summary

Bitcoin is a financial investment product that relies heavily on event-driven developments. The overall macroeconomic situation is currently very favorable: in the political field, Bitcoin is gaining recognition in more and more countries; in the financial field, the traditional financial system is shaky; in the technological field, the Bitcoin expansion issue is expected to be resolved this year; and for players who are determined to withdraw their coins to their personal wallets, it doesn’t matter whether the exchange is stolen or not.

There will be a large number of black swan events in the next three months, and the Bitcoin trading market will surely usher in another bloody storm.