Saturday, 1 November 2014

Reason for Bitcoin's Price Decline

As I mentioned in the article BitCoin: Like Father Like Son that the timing of the birth of Bitcoin was in no small measure due to the Fed's QE program. The article further points out that as Bitcoin stands at the moment, the parallel rise of gold and BTC was due to the fear of collapse of the USD fiat currency caused by QE.

It seems the reports of USD's death has been greatly exaggerated, at least for the moment.

USD price chart (source: stockcharts.com)

As seen from USD index price chart that after about a year of price consolidation, USD index broke out in July. Price of gold and BTC started to decline as well. When the news about the end of QE program was announced, we saw another steep rise in USD index price. Expectedly, we saw another leg down in both the gold and BTC.

BTC price chart (source: coindesk.com)

Many markets are correlated somewhat. In the case of USD on the one hand, and BTC and gold on the other, are negatively correlated, meaning when USD goes up, the other 2 go down, and vice versa.

Since crude oil is denominated in USD, and so an increase in USD will mean lower oil prices. And so price of crude oil is in the same camp as BTC, and gold. Of course, the large magnitude of the decline in the price of crude can't be explained by the relative small increase in USD price rise alone. Other factors must also be involved (like supply increase).

One important note is that while USD and many other markets are correlated, USD market is the actor while many other markets are being acted by it, and never the other way around. In other words, movement in gold markets will not affect USD currency market. USD is the prime mover. It's a barometer of not just U.S. economy, but world economy.

While I see short term decline in BTC price, I haven't given up on it. If it falls further, I'll probably get some myself.

Disclosure: I own a minimal amount of Bitcoin.

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