We can put bitcoin and virtual currencies in general in the record books as a mania, at least so far. Whether it stays around will be based on many factors – economical, political, and logistical. In terms of pricing, we can say that bitcoin is clearly in the blow-off stage, but let’s go back to 2013 when the “mania” started.
Take a look at the graph below, presented by a professor of Economics in Hofstra University:
This is a generic chart that illustrates the phases of a “new” instrumental, or the stock of a company in a new exciting field.
Let’s compare the generic mania chart with the bitcoin chart.
(click to enlarge)
1) The stealth phase is where the new technology, or instrumental is still only coveted by industry insiders. This is a period marked by low volatility. When the bitcoin market started, still only few understood the cryptocurrency.
2) Then, during the awareness phase, as reports of the company, technology, or new paradigm starts seeping into industry periodicals, we start to see stronger valuation and more chatter about the viability of this new “thing” we call bitcoin.
3) This initial rally usually has a first sell-off, and some are steep while others are soft. We saw this in bitcoin during March-May of 2013 when price popped up from below 15 to about 250. Then, it returned to consolidate around 100.
4) Then, there is a take-off that will involve media attention and lots of enthusiasm. This was the case with bitcoin in 2013. People were buying computers, loading up on processors to mine the virtual currency. More and more businesses started to accept bitcoin.
5) Bitcoin (BTCUSD) went from the price of around 10 during the stealth phase to around 100 during the first exposure and sell-off, then to a peak of 1163 amid the mania.
6) Then price started to dip, reflecting a capitulation, exhaustion, whatever you call it – the mania is over and now in October, bitcoin has made a new low on the year last week at 275.
7) As price falls closer to 100 or 200, we might start hearing more negative assessments of bitcoin, of why it will not last as a currency. This is the despair stage and this is probably when we should start thinking about buying again and holding IF we believe bitcoin is to stay.
8) We will have to see a couple months of price stability before we can call for a return to mean stage at which point, bitcoin would have completed its initiation cycle as a new paradigm and we might start to see smaller volatility and more liquidity enters this market with more “efficient market” forces.
Past Post by Author: BoJ Stands Pat; a Look at the USD/JPY