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On October 5, 2014, the price of Bitcoins dropped as low as $286.56. Reporting on it the next day, MarketWatch.com suggested that the reason for the decline was due to “…the sudden volatility to a large sell order for 26,000 bitcoin that was placed on the Bitstamp exchange, according to a story on CoinDesk.”
The explanations are always very interesting and may be the essential contributing factor that caused the decline. However, when it comes to the projecting of downside targets, Edson Gould’s Speed Resistance Lines (SRL) have provided the clearest estimates of downside risk. What follows is the chronicle of our analysis that preceded, well in advance, the price movement of bitcoin along with updated targets.
While we didn’t have a date for the expected decline, as early as November 2013 we were able to project reasonable downside and upside targets for bitcoin. On November 19, 2013, we said the following of Bitcoin:
"Our conservative downside target for Bitcoin, based on the peak closing price of $785.50 is $384.83. The extreme downside target is $261.83. The worst case scenario is for Bitcoin to fall as low as $152.83 as indicated by the red line on the chart.
“As we've written many pieces on the topic of Edson Gould's Speed Resistance Line, we've made some observations that we think should be highlighted at this time. For the first time, we're going to provide what we believe might be an upside target. In the case of Bitcoin, the next conservative upside target is $1,154.49 if the most recent peak of $785.50 is exceeded. This is a tentative estimate based on observations of the many successful downside SRLs that we have run in the past. We'll be on the lookout for what may come next."
It should be pointed out that the numbers used for bitcoins in November 2013 were based on the Mt. Gox quoted price. Subsequently, Mt. Gox, has gone out of business. On March 10, 2014, Mt. Gox filed for U.S. bankruptcy protection. However, Mt. Gox, up to the point of the rumored troubles, was in alignment with the Coindesk.com bitcoin average.
In an attempt to demonstrate the difference between Gould’s downside SRLs, if we had estimated the downside targets for bitcoin based on the Coindesk.com average instead of Mt. Gox numbers dated November 19, 2013, we would have come up with the following downside targets:
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$324.60 instead of $384.83 (conservative downside target)
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$224.79 instead of $261.83 (extreme downside target)
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$125.00 instead of $152.83 (worst case scenario)
Additionally, the upside target of $1,154.49 that we projected for bitcoin on November 19, 2013 using Mt. Gox data would have given us the extreme upside target of $973.81 had we used the Coindesk.com average.
Below is a graphical representation how the price of bitcoin played out since November 2013 based on the Coindesk.com average of four exchanges.
On average, the estimates based on the Mt. Gox numbers were reasonably aligned with the Coindesk.com numbers, when calculated in retrospect. However, with an increase in price from $99.81 to $1,147.25, participants should always step back and reassess the situation. The reason why is because there have been few instances where a parabolic increase in price is sustained in the form of a new plateau. With this consideration in mind, we believed that the prospects of the downside targets, dismal as they seemed at such heights, were a distinct reality.
As the decline from $1,147.25 began, the Mt. Gox index deviated widely from the Coindesk.com average. On February 16, 2014, we concluded our bitcoin analysis with the following commentary that is critical to merging the issues with the Mt. Gox exchange and the Coindesk.com average price:
“While there are other Bitcoin exchanges offering higher bid and ask prices, they cannot avoid the reality of the problems that currently plague the Bitcoin market. Leaving aside the possible arbitrage opportunity, Mt. Gox offers up the most extreme and negative price data and appears to be protecting their constituents. These are necessary attributes that make the data being offered by Mt. Gox most realistic and applicable to our attempt at analysis.
“In the final review, either the other Bitcoin exchanges will drop to the quoted Mt. Gox level or Mt. Gox quotes will rise appreciably. Regardless, at the current level of $300-$200, Bitcoin is fairly valued.”
In this case, the bitcoin average, as published by Coindesk.com, did manage to decline to the Mt. Gox level in the $300-$200 range. This suggests to us that, for speculators only, bitcoin is worth the plunge. Based on the revised price peak of $1,147.25, bitcoin has a conservative upside target price of $723.34 and an extreme upside target of $1,446.68.
NOTE: Anyone venturing into the world of Bitcoin for the purposes of speculation should assume the risks that are generally associated with such activity, which may include the total loss of funds.