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  • Why Bitcoin Is Going Down. And Why Bitcoin Is Going Up After That. 0 comments
    Apr 10, 2014 10:07 PM

    Today is April 10, and as of right now, Bitcoin has dropped from around $450 all the way down to a wallet-crushing $338, a nearly 25% drop in less than 24 hours. This is after weeks of steady declines -- on March 26, one Bitcoin was worth nearly $600. Many in the Bitcoin community are worried, and many others offering empty reassurance that everything will be ok because Bitcoin Is The Future. I will offer reassurance, but am happy to back it up with evidence, pattern, and fact. Bitcoin nonetheless is going to transform the world, but blind faith isn't going to get us there any faster.

    So, who am I? I'm some guy on the internet. I also happen to have worked as an Analyst at a bulge-bracket investment bank, I'm a software developer, and I operate a ~2.5TH/s Bitcoin mine. So please take this article's conclusion with a grain of salt, but I implore you to assume at least some of this article's contents are informed.

    As I mentioned, today is April 10, 2014. Bank transfers take 3 days to settle and for the funds to become available. Guess what happens in 3 business days? Personal tax filings are due; that'd be April 15, 2014, and there's a weekend between now and then, which gives us three (3) business days. I'll let you continue to reflect on that for a second.

    Taxes are due the same day every year, for the most part. Last year, taxes were due on April 15, 2013, which was a Monday. Flanked on its left by a weekend, that would make April 10, 2013 also the last day on which you could sell your Bitcoins and transfer them into your personal checking account from another account. The temporal arithmetic is identical, so let's look at what happened on this day last year:

    (click to enlarge)

    Two massive red candles occur on April 9th and 10th, and the price stabilizes the next day, and forms a double-bottom pattern on April 15th, Tax Day. This is a highly bullish formation, and a similar pattern has already begun this year.

    The practical reasons for this are obvious: many Bitcoin investors and miners have tax bills. If you are the kind of person with lots of extra fiat to invest in something as risky as Bitcoin, then you likely earn enough money to have a nice big fat tax bill every year. The same phenomenon occurs in the stock market every December, in what investors refer to as "Tax-loss Selling", and the "January Effect". Investors sell of losing stocks in the last five days of the year -- between Christmas and New Year's -- for tax write-offs, and then re-invest that money immediately in the first few days of January. This tax-related phenomenon is substantial enough to effect a predictable pattern in the U.S. stock market, which has a total market cap of around $20T (that's T for "Trillion"). The market cap of Bitcoin is over a thousand times smaller, and thus is more affected by smaller dollar-value movements in capital.

    Bitcoin difficulty is still rising at an impossibly-meteoric rate. This means that the very large mining operations are still buying tons of hardware and are not slowing down. It's as if they don't care about the price! The large mining operations, funded by foam-flecked Silicon Valley VC wizards, I argue can be viewed as a proxy for what market analysts refer to as the "Smart Money". I'm not so interested in what basement-dwellers are wringing their hands about on Reddit; I'm interested in what rich people are doing. They are buying and investing in mines and service providers in the Bitcoin ecosystem. These firms are very good at doing the sorts of things that mint millions of dollars, and so I'm happy to do what they are doing.

    Update: Below is the 1-hour chart for the evening of April 10. Notice a short-term reversal on strong volume after 8pm (20:00) EDT, which is the timezone I live in. The astute reader will observe that 7:59pm EDT is the last moment at which any retail bank in the contiguous United States will initiate a funds transfer, which is 4:59 PDT. Beginning at the next moment, bulls take over and bid the price up over 10% in three hours. I'm as susceptible to confirmation bias as anyone else, but this chart speaks for itself. I'll update as I see any further confirmation or refutation of the pattern I predicted earlier.

    8pm reversal

    Themes: Bitcoin, VC, Mining
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