Bitcoin Watch – Bitcoin rattles a few speculators as it slips below USD10,000 then rebounds again – “Distress” or bounceback – looming?

Today’s movements took the crytocurrency across a trading range of more than USD2,600 over 18 hours. Its tumble to a low of USD9,186 pushed a month-long rout past 50 per cent and raised speculation of the “eventual” bursting of the bubble. However, Bitcoin rebounded USD2,092 in the next 12 hours to currently trade at USD11,278.

The Economist magazine has been sceptical about Bitcoin from the start. Today this is what it had to say:

“Perhaps the best way of understanding Bitcoin is through a model of how bubbles operate. The classic model, developed by Hyman Minsky and elaborated by Charles Kindleberger, a historian who studied bubbles, has five stages: displacement, boom, euphoria, financial distress and revulsion. The displacement is some technological development that can be used to justify a “new era”—railways, canals, the internet or blockchain. A boom then occurs and drags in more and more investors; at some stage, we reach euphoria, where the boom is widely known to the public and there is talk about those who made millions from the trade. This stage had been reached in November, when there were adverts for cryptocurrencies on the train and discussions on popular radio programmes.

“In the euphoria stage, people buy because others are buying and because they anticipate being able to sell quickly at a higher price. For a while, this trend is self-reinforcing. At some stage, however, doubts set in; some people decide to take their profits while they can. Bad news occurs; with Bitcoin, it seems to be reports that authorities in South Korea (where trading has been particularly active) are going to crack down.

“Once the price starts to fall, the psychology changes. People who bought early and were counting their millions suddenly see a dent in their wealth (and it is worth noting that you are not really rich unless you have got into the asset class and out again). Other people may have bought above the current price and are bitterly regretting their mistake. Bargain hunters jump in and temporarily drive the price higher but it doesn’t last.

We have not yet reached the “distress” stage but we might be near it…..”

One problem for investors is the often less than immediate ability to liquidate losses (or profits), so that when a panic burst of selling occurs, it can escalate as owners become desperate to sell before it goes lower.

On the other hand, there are many savvy “investors” who have sold on the low side and bought back when the price has bounced back. Recent history suggests that might be repeated. USD10,000 seems to be the bounceback point so far.

The Economist remains unconvinced.

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