In the last two weeks, since Dell’s announcement that it would accept Bitcoin as payment from its customers in the United States, the Bitcoin price has been falling and the community has been clamoring to find out why. People all over the Internet have embarked upon wild goose chases in order to find the cause of the current Bitcoin price decline, myself included. This decline has led many people to the belief that news—one of the most important movers of the Bitcoin price—really has no effect on the markets. They point to the fact that the Dell announcement had no impact on the price and in fact, a few days after the announcement, it actually began to fall.
However, it simply cannot be denied that news developments do indeed have impacts on the Bitcoin price. While the most major pieces of news have the largest directional influence in the market, every single piece of news—positive or negative—has some impact on prices. Even if it is to convince individuals to refrain from buying or selling. Therefore, the perceived lack of influence that recent, positive news stories have been having on the Bitcoin price are unfounded; they have at least contributed to a foundation of confidence that could serve to cut down on some Bitcoin price volatility.
Furthermore, using the Dell announcement as evidence that news has no impact on the Bitcoin price is laughable, as the announcement had a definite impact on the price that has seemed to have been overlooked by the majority of the community. So, I decided to point this movement out in my latest Bitcoin price analysis. Approximately an hour and a half after the Dell news hit the community, the price rose by 2.26%, peaking at $634 and settling in the $620s before beginning its decline.
The Obvious Reason For the Bitcoin Price Decline
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Although I was correct in identifying the definite effect the Dell news had on the Bitcoin price, the rest of my analysis was pretty inaccurate. I speculated that the markets had set up a new temporary price floor at $620; when that turned out to be wrong, I updated the article and said that perhaps the people who were responsible for the 2.26% increase in the price were disappointed by the lack of a major upswing, resembling those that have previously happened in response to major, positive Bitcoin news, and began selling, returning to the soft floor of $600 that I had speculated on in previous a previous analysis.
Then, the price dipped below $600, into the $590s, and continued to fall for the rest of the week and is still falling well into the present week (I, however, still maintain that $600 was actually a soft floor, for there is strong evidence to support that claim—namely the fact that $600 was the stopping point of the sell off that happened in the waning Silk Road auction excitement). Finally, the Bitcoin community on Reddit informed me (without making me feel too stupid) of an obvious cause for the initial fall from $620 to $600 that, for some reason, I had completely overlooked; the initial spike in sell volume most likely came from Dell immediately converting a large amount of bitcoins into fiat. Their announcement probably created a burst of bitcoin transactions with Dell, which were of course converted into fiat by the company.
Why My Analysis of the Bitcoin Market Was Wrong
Additionally, I made two mistakes that I myself warned about in my own series on how to conduct proper Bitcoin price analysis. Firstly, I did not wait long enough to analyze the markets following the Dell announcement. If I had waited a few more days, I would have seen the fall in price and would probably have been able to figure out that it was coming from Dell converting their Bitcoin revenue to fiat. Secondly, I have relied on determining price floors far too heavily in my last two analysis articles. As I stated in my guide, price floors are very hard to accurately identify and do not contribute much value to analysis, especially when you can simply look at the price charts and see if it has leveled out, is rising, or is falling—there is no need to predict a specific price point that will serve as a floor. Yet, I became enamored with predicting precise numbers, something that many positivist Bitcoin price analysts constantly fall victim to.
We Don’t Always Need A Specific News Story to Explain Bitcoin Price Movement
After being embarrassed by having a mostly inaccurate analysis published on Coin Brief, full of predictions and speculations that I really should not have made, I spent 2 or 3 days trying to come up with a news-based explanation for the falling Bitcoin price. I tried to link together the Dell news with other recent events to construct a theory of accumulated fears or shrinking confidence that caused the selling. None of it was satisfactory and I became increasingly frustrated with myself; my frustration grew as my attempted explanations became more and more elaborate.
So I had to take a step back and reexamine everything from a much broader, theoretical perspective. Doing so cleared many things up for me. Rather than trying to employ the analytical tools that are based in praxeology, mainly news and price charts without myriad technical indicators, I looked at praxeology in general. From an analytical point of view, we look for news events because they influence valuations. However, from a purely praxeological point of view, we can simply state that humans have valuations. Revisiting that basic truism brought me to a much simpler, and far more satisfactory, reason for why the price has been declining: people are merely valuing their bitcoins less than fiat currency at this point in time. In other words, the Bitcoin price is going down because people are selling bitcoins!
This notion is so simple that it seems absurd. Yes, of course the Bitcoin price decline is due to selling! But why are people selling, what is making them do so? People are selling because they desire fiat more than they do bitcoins, they merely value bitcoins less. The possible reasons for this shift in valuations are infinite; the Bitcoin community has been proving as much in recent days. Speculations on the cause of the Bitcoin price decline range from whale activity to miners not keeping their block rewards. In reality, there is no solid way to determine the reason behind the sell off. The only thing we could do is ask each individual person who is selling their bitcoins why they are doing so. And that would prove extremely difficult; given the pseudonymous nature of Bitcoin, we probably would not even be able to identify most of the sellers.
The lesson to be learned here is that there does not always need to be a concrete, objective reason for why the Bitcoin price is falling. Sometimes it just happens. In conducting analysis, we tend to get swallowed up in news stories, trying to identify a precise cause for a movement in the Bitcoin price. But there is not always a single reason for price changes, so news cannot always be used to identify the causes of price shifts. In cases such as these, with the current price drop serving as an example, all we can do is say that people have changed their valuations for one reason or another.
So What Can we Say About the Current Bitcoin Price Decline?
Our inability to pin down a single cause for the Bitcoin price drop—due to the lack of a single cause—does not render us incapable of providing a useful analysis of this price shift. While all we are equipped to say may seem like a vague and purely theoretical statement, it will produce far more useful information than any of the positivist reports that are flooding the various Bitcoin news websites.
As per usual, the positivist analysts are ignoring the human element that is so essential to all economic activity and are treating price charts and technical indicators as things that can render useful information without considering human action. This extremely flawed methodology will always produce outrageous predictions and reports filled with lots of technical jargon but no actual substance. One one hand, we have those analysts who make incredibly specific predictions and are always way off the mark. On the other hand, there are those who cover so many possible outcomes that the analysis is completely meaningless. A Bitcoin price analysis is of no use to an investor if all it says is, “At this point in time, there is an equal chance for an infinite amount of scenarios to play out.” Furthermore, to absolve themselves from making horridly inaccurate price predictions, this latter group of analysts give an outrageously broad range for the future Bitcoin price. For example, one of the most recent of these kinds of analyses listed several possibilities for the future movement of the price, each of which having the exact opposite outcome of the others. And when the writer predicted the future price points, based on mysterious mathematical tools of analysis, he stated that the price could either enter free fall or shoot up to $680 and beyond! There is absolutely no use for this analysis, then, if the best the writer can do is provide an infinite range for the future price.
The purpose of providing analysis not to lay out 100 different scenarios based on various mathematical models, such as Fibonacci sequences and Elliot Waves, and give an equal likelihood for all of the scenarios to come true, in addition to a horribly broad price prediction. Analysts are supposed to state which scenario they believe is most likely to happen after they take into account the most recent market data and the prevailing attitude of the community. Furthermore, we should report on the likely future movements of the trends, rather than making specific predictions for prices.
So, all we can say on the recent decline in the Bitcoin price is this: Dell exerted a downward pressure on the price by injecting a burst of selling volume into the market and the price fell from $620 to $600. For whatever reason, this decrease in the price caused a sell off; the Bitcoin price has gone well below $600 and is currently at $568.74 (as of 12:45 AM EST on July 31st, 2014). We must take into consideration the fact that the Silk Road auction lent a great deal of upward pressure on the price, pushing it into the $640s and settling down in the $620 range. It appears as if the sell off caused by Dell’s initial selling has deflated the price growth caused by the Silk Road auction. If the pre-auction valuations have remained constant, then we could possibly expect the price to fall all the way down to pre-auction levels and then flatten out, awaiting the next market-shifting event. However, it is highly unlikely that valuations have remained constant for this long, that much can be confirmed by observing the sell off that is underway. Therefore, there really is no way of predicting, with any degree of accuracy, when the Bitcoin price will stop falling—only time will show us where the downward pressure will lighten up. The price will continue to fluctuate, as it has been doing, until it reaches a point where enough individuals value Bitcoin more than they do fiat currency. At that point, people will begin buying, hoping to profit from the arbitrage, thereby igniting another price rise. That is, of course, assuming that no extremely negative news further shifts valuations between now and whatever time the price decides to flatten out.