A Falling Bitcoin Price

Hi, I’m Kevin Zhou, Economist at Buttercoin a Silicon Valley / Wall Street backed Bitcoin Marketplace (sign up here).  Every week we take a look at what’s happening in Bitcoin and share it, here’s the latest. 

This week markets dropped from $320/BTC to $260/BTC amidst the Bitstamp hack before rebounding a bit to $300/BTC.  As I'm sure you all know, Bitstamp's wallets were compromised with an official announcement on Monday.  With the drop in price a day or two before this announcement, some suspect that there was insider knowledge of this breach and that this was responsible for the selloff.

Difficulty is set to go up by 12.5% in the next adjustment which suggests the past two weeks have seen the fastest block generation speed since early November.  Some of the selling pressure in the past two weeks can be attributed to this.  On top of that, end of 2014 may have seen some bitcoiners sell for tax reasons.  Of course we have to net these selling pressures against the increase in consumer demand related to google search volume spiking at the end of last year (mostly due to the Bitcoin Bowl): .

On a longer time horizon, bitcoin has dropped by about 60% over the past 6 months.  Some suggest this is due to dollar strength.  I think this can only account for a fraction of that effect.  The trade-weighted dollar index over the past 6 months shows about a 10% gain in dollar strength.  Moreover, dollar strength is arguably just euro and yen weakness rather than anything intrinsic to the buying power of the dollar.

Looking forward, a miner on /r/bitcoinmarkets shares his insights on mining economics and the mining industry in general: http://bit.ly/1zV4ruP.  He suggests that at a super efficient 5 cents/kwh (including hosting, electricity, employees, and other marginal costs) and the current difficulty (pre 12.5% jump), the marginal cost of bitcoin production is around $70.  He also suggests that most mining farms are well above that cost (e.g. ASICSPACE at 10 cents/kwh).  This suggests that the less efficient miners will get pushed out of business soon and margins are shrinking at a rapid rate.  He continues that the Chinese have stopped building mining farms since their electricity is too expensive.  Mining will continue to consolidate to the most efficient mining operations with the cheapest costs.  He suggests that Bitfury is currently one of the most efficient, weighing in at 5 cents/kwh with their self-run datacenter in Georgia.  Not much is known about 21e6's cost basis.  This is all very reminiscent of GPU mining saturation in 2011.

Other News:
  • Japanese police suspect gox was an inside job: http://bit.ly/14qwgTc.  I'm not fully convinced that this was an inside job but I do think the missing coins are very closely related to the 2011 crash to $.01/BTC on gox.  Whether it was a hack or an inside job, it wouldn't surprised me if Karpeles covered it up in hopes of making customers whole through collecting trading fees by keeping operations open.
  • Bitmex launches their BVOL series, 30-day historic volatility futures contracts: http://bit.ly/14rAGd7.  It's good to see these kinds of structured products come out.  I expect more structured products to be developed in the coming year.
  • Cointerra defaults: http://bit.ly/1BJyh7O.
  • Vault of Satoshi closes: https://www.vaultofsatoshi.com/.  The team there has been working on a new project and, in light of some success, chosen to pursue that opportunity instead.
With so much blood on the streets from a year of a falling bitcoin price and the latest downturn from Bitstamp and with a sentiment of despair and nausea in the air, it may be a good time to buy some cheap coins.  Over a time horizon of a year or two, even with the remote possibility of the price dipping down to the marginal cost of producing a coin (i.e. sub-100) in the interim, I am bullish on bitcoin price.  Better infrastructure, significant merchant adoption, increased awareness, increased fiat troubles around the world and an increase of talented people working in the space suggest long-term prospects are good.

Kevin & Team Buttercoin

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