GAMEMAKER WATCH: WHY BITCOIN CRASHED AND THE FRANC SPIKED

Two events from the past week stand out as particularly memorable. One may or may not be remembered a year from now, depending on how things unfold going forward. The other – the Swiss franc revaluation – definitely will be.
The possibly memorable event I am referring to was the spike down in the bitcoin price to $160 / 900 RMB. If we consider the shake-out scenario discussed last week, we did indeed reach the $160 target price level, but the price did not remain under $180 for long. Those who bought at $160 did well, since the rebound went as high as $233.
If the goal behind recent price action is to scare speculators into selling, several weeks of sideward movement at today’s relatively low levels could be an effective psychological tool to accomplish that.
Time will tell, however, so it’s simply too early to judge if current price levels will do the trick, or if prices still need to go a bit lower, or if a completely different scenario unfolds. All we can say with any confidence is (a) that this is one plausible scenario, and (b) that a bottoming out of the bitcoin price in the near future would potentially fit in with a broad-based reversal in the fortunes of the US dollar. More on that later.
With regard to potential bitcoin price action over the next several months, one development worth mentioning is the tightening of Chinese margin requirements for stock trading. This week the minimum deposit was raised from 300000 to 500000 RMB (approx. US$80000), thus squeezing out some of the gambling public. As a result, the Shanghai stock market promptly fell by 260 points (7.7%).
Both of these developments can be seen as potentially positive for the bitcoin market. Why? For one thing, the Chinese stock market looks ripe for a continued correction to the downside, while the opposite is true of the bitcoin market. Secondly, there are no comparable restrictions applicable to bitcoin exchanges. On the contrary, several offer up to 20:1 leverage to all comers. While these factors alone are unlikely to be sufficient to drive a sustained rebound in price, they certainly supply an ideal context for such a scenario.

This post was published at Dollar Vigilante on January 19th, 2015.

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