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Currencies BitCoin Bitcoin Surrenders Most Post-Microsoft Gains

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Since our last update, bitcoin surrendered most of the post-Microsoft gains. Prices fell from a high of $356 per coin to a low of $339.60 yesterday. We are currently quoted not far from the lows at $342.50 on BTC-E. As usual, prices are higher on BitStamp at $350 and OKCoin at $348.

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We’ve seen this pattern repeated several times this year. A merchant accepts BTC, the initial news causes a market spike but after 24-48 hours the gains are completely reversed. The most recent example of this was during PayPal’s merchant integration in September. On September 23rd bitcoin jumped over $50 dollars as news broke that PayPal added a BTC option to its Payments Hub. The next day however, we saw an almost complete reversal as BTC/USD lost close to $50 dollars to hit $400 dollars per coin.

This reversal phenomenon could be explained in two ways. The first theory is borrowed from other financial markets. In a downtrend, any positive news will be used by bears to get in at a better price. Reversely for an uptrend, here any negative news will be used to buy cheap. Bitcoin has been in a large bear market this year, losing over 2/3 of it’s peak value at $1090. Theory number two says merchants that accept BTC payments immediately convert all their coins to USD, contributing to the downward pressure. While news for increased bitcoin adoption may be initially positive, after the euphoria fades, traders will start to factor in future bitcoin conversion to USD by Microsoft, in this case.

While both of these theories have some merit, number one sounds more plausible because in a lot of these cases, the reversal happens quickly. However, increased merchant adoption with no corresponding increase in consumer interest is bound to weigh on prices longterm. This is exactly the situation bitcoin found itself in 2014, theory number 2 may be more applicable to explain some of the longterm BTC losses.

As the chart above shows, currently BTC/USD is trading between the %61 and %50 Fibonacci retracement levels of the most recent move up, so we have already reversed most of yesterday’s gains.  While the trend is to the downside, it would be prudent to wait for bitcoin to take out yesterday’s swing low at $332 before making any decisions. Below here, notable support levels include $319 and $300.

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