Analysis: Bitcoin Price Breaks $600

The rise of Bitcoin prices continues on strong. Sometime during the morning of May 30, 2014, the price of Bitcoin broke $600 dollars after several days of stagnation between $565 and $570. It is possible that this jump in prices is due to a recent announcement that Dish Network will accept Bitcoin as payment for its services. However, while this major announcement likely is responsible for a fast, $30 jump in prices, it appears that this increase is simply a continuation of the upward trend established last week as a result of steady innovation and a constant stream of positive announcements in the Bitcoin community.

Recent “Analyses” that Indicated the End of the Bitcoin Price Increase

Earlier in the week, several reports were released claiming that the upward trend in Bitcoin prices was over, pointing to a few days of inactivity and slight dips in prices. Sticking to typical Bitcoin “analysis” cliché, the reports took these few days of lackluster trading and declared that the “bubble” was over and that, judging by the analysis of recent trends, we could expect to return to the $430-$450 price floor that was established during April. These erroneous analyses just highlight the inconvenient, and generally ignored, truth that conducting trend analyses based purely on empirical data and mathematical equations can never be legitimately accurate. Sometimes these analysts get lucky and their empirical predictions coincide with reality. However, a truly accurate, authoritative prediction about the future of any market is impossible. Markets are necessarily uncertain, therefore any prediction about the future of the market is speculative and will in no way be 100% certain. Thus, looking at data from recent days and claiming that the Bitcoin price breakout is over is painfully erroneous. It is a perfect example of how analysts who believe that they can employ statistical equations and produce an apoditic prediction of future trends will always end up embarrassing themselves by making wildly inaccurate predictions, such as claiming that the market is due for a correction based on three days of slow trading.

Causality

These analysts fail to take the fact of causality into consideration when drawing these trend lines and unrealistically extending them into the future. Causality is a concrete reality of human action, and therefore any economic activity. Everything is done for a reason; humans believe that by employing action they can produce a desired outcome. That implementation of action is the core of causality and the reality of the human action makes causality unavoidable. If only these “analysts” had taken causality into consideration, the reason for the slow trading and subsequent stagnation of prices at the beginning of the week would have been clear. It is a well known fact in the trading world that Memorial Day weekend marks the unofficial start of summer, and that the following week is generally a slow week in the markets. This simple causal relation between the human desire for leisure time and a national holiday makes it obvious that trade in any market will be slow immediately before or after a major holiday. To ignore things like human action and causality is to ignore the foundation of the economic science. Equations and regressions and myriad mathematical models can produce a number of conclusions that can be repeatedly recreated in the evenly rotating economy, but that does not mean that the conclusions from these models will carry any significant weight in the real world. Simply being positivist does not make something scientific. The scientific methodology must be relevant to the environment that is being studied. You cannot study economics without studying human action, just like how you can’t study the ocean without looking at the water. The Bitcoin community, and the science of economics in general, can glean a great deal of insight on the market by accepting the truth of causality and human action

Why Prices are Rising

As mentioned above, the sudden jump in the Bitcoin price from $570 to $600 can likely be attributed to the Dish Network announcement. However, this $30 increase should not be considered a price breakout independent of the establishment of last week’s upward trend. While this single increase in the price of Bitcoin may come from the Dish announcement, the general upward trend comes from a number of announcements and innovations in the Bitcoin community. Most of these come as innovations in the payment structure of Bitcoin. Coinbase announced recently that they plan on becoming “the MasterCard” of Bitcoin and Xapo, a wallet provider, has unveiled the release of their Bitcoin debit card that will allow people to pay for things with bitcoins in stores that don’t even accept Bitcoin. The Xapo card can be used in stores that do not accept Bitcoin because it operates on the existing infrastructure of MasterCard; so, this Bitcoin debit card can be used anywhere that accepts MasterCard. These developments are just a few in a sea of new innovations in the Bitcoin community. With constant advancement in Bitcoin technology, it isn’t a surprise to see an upward trend in the price of Bitcoin. If these innovations continue to be rolled out during the summer, we can expect this upward trend to continue; all things being equal, of course.

But remember: there are still early Bitcoin investors that are sitting on hoards of bitcoins at somewhere around a 50% loss due to the price crash in late 2013. The price may very well rise above $1000 again, but that will definitely incentivize the early investors to dump their holdings of bitcoin to finally make a profit on their investments and to avoid another Bitcoin roller-coaster ride. If that happens, we will see another sharp drop in prices and a return to a price floor. How low would that price floor be? It can’t be determined for sure, it would necessarily depend on the extent of the sell off.