The Newfound Stability of Bitcoin Will Not Last Long

The story concerning bitcoin’s notorious volatility the last month is that there’s no story. This isn’t a “noting that there’s nothing noteworthy” type of observation. Lessening volatility equals increased consumer confidence equals increased liquidity. That is, a more stable, and ultimately more legitimate investment opportunity. Or, if your interest into bitcoin is less profit-driven and more ideological, it makes bitcoin a more legitimate alternative to the “fiat currency” market.

Haven’t we been here before? The last time bitcoin appeared to have found its “true value” was mid-February to mid-March. That value though, was approximately $100 higher than this new average. In between these two periods of calm was a storm, and as usual, it came out of China.

At that time the price of BTC tanked down to $360 before rebounding after fears that China was about to clamp down on BTC even harder appeared unfounded. Since then, the price has, by cryptocurrency standards, remained sure and steady. There’s been blips, but nothing too significant.

And even before that, there was yet another period of false security. That was in January, when BTC held in the $730-$900 range. While past performance is certainly not necessarily an indicator of future performance, 2014’s price movement has played out in an identifiable pattern: relative stability, followed by tightening Chinese restrictions, followed by a price drop. Rinse, repeat.

This is not to say there will certainly be another Chinese clampdown that will, like clockwork, drive the price range down. The most significant concern for BTC holders and potential investors is if an event like that happens, if bitcoin is “strong” enough to withstand it without plummeting.

Which it can do, if the market is liquid enough. While BTC continues to evolve, and the market around it becomes more sophisticated, it needs these periods of stability and confident trading, lest it remain overly vulnerable to negative news. Or, in the words of Equities.com analyst Nick Bhandari, it needs liquidity to “fight off speculative binges” or other types of market manipulation.

Has BTC gotten that liquid? Not really. According to the Blockchain, which records all BTC transactions, volume is actually down, with May 15 transactions only totaling 90,000 BTC (out of a 12 million total float.)

This lowered volume could mean its price is due for a pop, as some technical analysts have surmised. It could also mean simply Chinese investors are holding, fearful moving the currency around will expose their holdings.

It’s a lot of conjecture for a famously secretive digital currency. But one thing is certain: China’s live-and-let-live policy concerning bitcoin will not stay static forever. Its existence as a “special virtual commodity” that denizens can trade at their own risk will almost certainly not continue unchanged forever, or even the rest of the year.

Since China first got into the bitcoin craze en masse in November, causing the massive bitcoin spike (and dropdown) we’ve seen since, the one identifiable pattern has been that stability will be interrupted with regulatory tightening, which cause spikes then rebounds. The stability can only hold if there’s enough liquidity.

If no news comes out of China for awhile longer, BTC’s price can withstand further regulatory tightening in China, and perhaps even increase. But otherwise, expect any bad news to once again rock the illiquid currency’s price down $100 – or more.