The past few days have been chaotic on the Bitcoin markets, with the price falling drastically from the $660 range to the mid $500s and then rising again to the $570-$580 range. Lots of speculation has been going on in the midst of these price fluctuations– especially during the massive plummet that occurred last night (June 12, 2014). Two revelations in particular have come to surface over the past few days that has definitely had an effect on the Bitcoin price: GHash.io, the largest Bitcoin mining pool, has been fast approaching 51% hashing power and has just recently attained that level of hashing power; secondly, last night, it was revealed that the FBI is planning to auction off the bitcoins seized in the Silk Road bust, which occurred late last year. Most people attribute the decline in Bitcoin price to these two pieces of news. However, there is a much larger, less obvious cause for the establishment of the downward trend that has occurred over the last few days. The GHash scare is half of that cause, and the other half has to do with the degrading state of affairs in Iraq. What does Iraq have to do with the Bitcoin price? That is what this analysis will attempt to explain. Unlike most market “analyses” I will treat the recent changes in Bitcoin price not as an empirical datum, a variable in myriad equations and models; in this real analysis, we will treat the decline in prices as a consequence of human action, and therefore we will try to identify the causal connections between current events and the trading actions of the individuals in the Bitcoin markets.
Recent Events Impacting Bitcoin Price
GHash.io’s Bitcoin Mining Hashrate
This current decline in the Bitcoin price likely started as a result of the fear surrounding GHash.io and the imminent achievement of controlling 51% of the Bitcoin mining hashrate. The fear started several days ago when the Bitcoin mining pool service starting approaching the high 40s in terms of hashing power. A mining pool gaining 51% of the world’s hashing power is something that has been feared for a long time because having the majority of the hashing power consolidated into one mining pool supposedly makes the blockchain vulnerable to a 51% attack, where the person in control of that hashing power decides to double spend, which many people think would destroy Bitcoin completely. However, one of Coin Brief’s writers just recently put out an article explaining why a 51% attack is highly unlikely, even with a mining pool that has 51% of the Bitcoin mining hashrate. And if one did occur, it would not be as big of a deal as many people in the Bitcoin community think it will be.
Regardless of whether or not a 51% attack is likely to happen or is even anything to worry about, the fear of an attack permeated throughout the Bitcoin community and markets. I believe that people started selling their coins, predicting the complete collapse of Bitcoin. I came to this conclusion because I noticed that prices started falling from the $640-$650 wall that was established last week around the same time that the fear of a 51% attack started rising. So, I attribute the initiation of the price fall to the GHash fear. However, the Bitcoin price seemed to hover around $600-630 during these days, so this fear does not adequately explain the price fall in its entirety. Thus, I came to my conclusions about Iraq and combined them with the fear surrounding GHash.
The Situation In Iraq
Recently, an extremely radical offshoot of Al-Qaeda has taken over several cities in Iraq, and are currently moving in on Baghdad. President Obama has said that he does not want to send the military to Iraq to fight off this terrorist organization, but he has not completely ruled military action out as an option. On the surface, this recent news coming from Iraq does not have any connection whatsoever to the Bitcoin price. How could this news possibly have an effect on the purchasing power of Bitcoin? Well, we have to look a little bit further back in time in order to uncover the potential connection between the turmoil in Iraq and the steady decline in Bitcoin’s value.
Two weeks ago, Dish Network, an American satellite TV provider, announced that it would start accepting Bitcoin as a means of payment for its services. As a result, the Bitcoin price jumped approximately $40. Until now, I just assumed that the price jump that occurred because of the Dish Network announcement was caused by people in the Bitcoin community buying more coins in anticipation of a future increase in value– due to a predicted increase in demand for Bitcoin by both new and existing Dish customers. However, after seeing how the American stock market has been reacting to the news in Iraq, and how the Bitcoin markets are reacting similarly, I started thinking that perhaps the Bitcoin markets have somehow become connected to the mainstream stock market. Why did I think this? Because, historically, the Bitcoin price has never been affected in any way by fluctuations in the stock market. A few weeks ago, on the day that Bitcoin broke $600, the Dow Jones Industrial Index was down by 300 points. A perfect example of how the two markets have been completely unrelated to each other. However, when the news about Iraq began hitting the air, the stock market started faltering, and the price of Bitcoin started falling a little faster. Yesterday, the Dow Jones closed at a loss of 109 points; over the last 2-3 days, the Dow fell by a total of approximately 200 points, including yesterday’s losses. On the same day, the Bitcoin price went from a steady decline to a free fall. So, there has to be some connection between the two. The answer may be Dish Network.
It seems possible that the Bitcoin price increase that followed the Dish announcement was not mainly comprised of buy orders from within the Bitcoin community, but rather the Dish announcement brought it some mainstream traders. That would explain the seemingly concomitant fluctuations in the stock market and the Bitcoin price as the mainstream traders reacted to the news in Iraq. The traders, who bought some bitcoins as a new investment, dumped them just as they dumped their stocks. This sell-off ran up against our next piece of news, the FBI auction of the bitcoins seized in the Silk Road bust.
Silk Road Bitcoin Auction
Last night it was uncovered that the FBI is setting up an auction for the bitcoins seized in last year’s Silk Road bust. Someone on Reddit saw a massive transaction on the blockchain, $17 million worth of bitcoin, and made a post on the Bitcoin subreddit asking the members if they thought it was the FBI. Then, someone posted a link to the US Marshal’s website, where the announcement for the auction was posted, thus confirming the Original Poster’s speculations. After this news hit the Bitcoin community, the price started falling even faster than it had been before.
Many people on the Bitcoin subreddit assumed that this impending auction, which would dump around 30 thousand bitcoins into the market, was the reason for the price decline of the recent days. Granted, it was most definitely responsible for the insane drop in prices– from $600 to $550 within one hour– but there is no way that it could have been responsible for the recent downward movement in Bitcoin prices. We only just learned of this auction yesterday, the price had been falling for several days prior to this announcement, so it just does not add up. That is why I believe that my theory, stated above, is the most likely reason for the recent drop in prices. Although, it is inevitable that this coming auction will severely depress the prices; the extent of this fall will be determined by the number of people participating in the auction, how high they bid on the coins, and what they do with the coins after the auction is over. It is possible that the bitcoins available for auction will be purchased as an investment, as it is difficult to purchase that many bitcoins at one time without being required to pay a high premium due to the purchases quickly pushing the price upward. This is a great opportunity for a wealthy Bitcoin supporter to capture a large number of coins to put away for future use.
Shortly after the brief panic over the Silk Road auction, the Bitcoin price returned to the $580 range and has stayed in that range well into today. It seems as though everyone who got in as a result of the Dish announcement has either completely left the market or has at least stopped selling for now. Therefore, it looks like the Bitcoin price will remain fairly steady or will even increase slightly until the auction comes at the end of June, all things being equal of course.
I do not claim, like most other Bitcoin analysts, that my explanations and predictions regarding the recent price drop and the future Bitcoin price are certain or concrete. I only argue that my explanations are based on sound economic thinking and make logical sense. Regardless, I believe that the structure and methodology of the analysis presented in this article produces much more valuable information than running numbers and drawing lines on charts. Take what you will from this analysis, as I have no financial advice to offer you. I present this information as a descriptive analysis from which you can base your own actions.