Picture this. You’ve invested a substantial amount of your net worth in a single commodity. You can’t hold it, touch it, or predict the price. It isn’t well understood and the market is extremely opaque; at this point no one even knows who is in the market. Most alarmingly, the price of your commodity swings wildly, but you’ve gotten lucky and the price has swung in your favor. For now. What is this you ask? You guessed it! You’re a bitcoin speculator…I mean investor. The price of bitcoin is a constant point of concern for folks who are trying to profit from the digital currency revolution, or for folks who are just rooting for the revolution to occur. So why is the price, the price? What moves it?
The enthusiasm for bitcoin from bitcoin believers in undeniable, but any enthusiast who claims to understand the price movements is either delusional or malicious. That doesn’t stop people from claiming to be oracles, though. A number of “professionals” claiming to understand bitcoin market movements have been preaching for years about things like “capital flight” and “deflationary principles” leading to price increases. Amazingly, almost no bitcoin “experts” ever claim the price is going to go down. This is in contrast to equity or bond markets where experts are often divided over future price movements. So who actually knows what drives the bitcoin price?
The answer may be no one. The market for buyers is very opaque, though we can deduce that most bitcoins begin life in the hands of mining organizations, which means the majority of bitcoins currently being mined end up in China. This seems coincidental in the maximum given the “capital flight” influence theory on bitcoin price. But how are these bitcoins being sold? Thanks to FATCA it is now problematic for U.S. citizens to have bank accounts in China, so the transactions must be through another medium; bitcoin?
Another segment of the bitcoin economy that turns bitcoins into dollars is the grey-market, spear-headed by organizations like Purse.io, who claim to match buyers and on Amazon. The story Purse tells goes like this: Buyers want items on Amazon. Other folks have Amazon gift cards from activities like Mturk or simply received them as gifts, and are willing to purchase items on Amazon in exchange for bitcoin. The kicker is that Purse.io claims this apparently large body of folks with Amazon gift cards don’t mind taking a steep discount in bitcoin, upwards of 20% in some cases. The more reasonable explanation is the Purse.io is matching carders and fraudsters who want to turn Amazon gift cards that they’ve obtained through less than legal means into less-traceable bitcoins, and Purse.io turns a blind eye by not using extensive KYC methods. Why would a rational person trade a very liquid asset, Amazon gift cards, into bitcoin at such a steep discount? They wouldn’t. But activity like this is what helps turn the wheels of the bitcoin economy.
Bitcoin is also buoyed by wash trading and arbitrage bots that operate on Chinese exchanges, which post massive volume, dominating the bitcoin exchange landscape. The reason Chinese trading volume is so massive is the lack of fees; bots can execute thousands of trades with no negative impact. Sophisticated programs that compare prices between exchanges act as a means of confirming the price across the industry. A cooperative set of bots on each of the major Chinese exchanges can engage in trading that props the price at a certain level, and keeps the price relatively level across exchanges. This may explain the more recent trend toward a less volatile bitcoin price.
Whether the price is driven by the black market, the grey market, or the Chinese market, the price of bitcoin has shown resiliency in the past 12 months. A stable price adds legitimacy to a digital currency that is still struggling to find a mainstream persona. More research is needed into the opaque bitcoin marketplace, but the intense desire for anonymity among bitcoin believers may act as a deterrent in bringing openness to the bitcoin ecosystem. What will the next 12 months bring? No one knows.