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What Mt. Gox's $115 Million Surprise Find Tells Bitcoin Traders

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One more close below $600 for Bitcoin might be prudent before going short.

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Just when you would think the situation with Mt. Gox couldn't get any stranger, it has. Apparently, the exchange "found" almost 200,000 BTC in one of its old wallets this month. The coins would be currently worth approximately $115 million. A statement published yesterday on the exchanges website reads:

Mt.Gox Co., Ltd. had certain old-format wallets [that] were used in the past and which, Mt.Gox thought, no longer held any Bitcoins. Following the application for commencement of a civil rehabilitation proceeding, these wallets were rescanned and their balance researched. On March 7, 2014, Mt.Gox Co., Ltd. confirmed that an old-format wallet [that] was used prior to June 2011held a balance of approximately 200,000 BTC (199,999.99 BTC). Mt.Gox Co., Ltd. investigated the presence of these 200,000 BTC, immediately reported it to its counsels in the application for commencement of a civil rehabilitation proceeding ("counsels"). A hearing took place on March 8, where a detailed explanation of the situation was made to counsels. Immediately on Monday, March 10, counsels reported the existence of the 200,000 BTC to the Court and the Supervisor.
 
Wait a minute. They found $115 million (!) that they had thought had been missing.
 
If you remember my firm's comments on Bitcoin and Mt. Gox from earlier this month, you'll recall its theories that admitted the possibility that Mt. Gox still held over 400,000 Bitcoins in its accounts. Any ideas that Mt. Gox may actually be sitting on more Bitcoins than it had publicly announced just gained a lot of credibility.
 
Another question is: How is it remotely possible to forget almost $115 million? More and more we're starting  to see what kind of organization Mt. Gox is (or used to be). The statement cited above ends on an even more uncertain note:

Please note that the reason for their disappearance and the exact number of Bitcoins [that] disappeared is still under investigation and that the above figures may still change depending on the results of the investigation.

Mt. Gox itself admits it doesn't have the certainty that this is the last surprise in its accounts.
 
Now let's turn to the charts.
 

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Yesterday Bitcoin slipped below $600 (dashed red line on the chart) on Bitstamp and closed the day below that level. This is an important piece of information since this was the first daily close below $600 since March 2. The short-term outlook became more bearish than not.
 
This is reinforced by the moves today. At the time of writing (1:30 p.m. EDT), Bitcoin is 2.5% down from yesterday's close. What's important is that Bitcoin attempted to get back above $600 earlier today but failed to do so; the price is still below $600. The move above $600 and the subsequent pullback suggest that there's short-term weakness in the market. The short-term outlook is now bearish, reinforced by increased trading volume. The question remains whether this is enough to open short positions.
 
In my opinion, going short now might prove profitable, but it's also risky. I'd like to see Bitcoin actually close below $600 today before going short.
 

Click to enlarge

On BTC-e, Bitcoin went 3.8% down yesterday on increasing volume. The currency closed the day below $600 (dashed red line on the chart), and the short-term outlook became bearish.
 
Today we've seen a continuation of the move down, interrupted by a strong move above $600 that was quickly denied. If anything is different on BTC-e than on Bitstamp, it's the fact that the volume on BTC-e hasn't increased as much as on Bitstamp. It's still already heavier than yesterday, but the overall bearish short-term implications are weaker for BTC-e.
 
Even though the situation is now more bearish than yesterday, I'd like to see Bitcoin close today below $600 before expressing any opinions on shorting Bitcoin. The current action suggests a more serious move down just around the corner, but this isn't a sure bet.
 
Summing up, in my opinion one should wait for at least another close below $600 before going short.
 
Trading position (short-term, my opinion): no positions. If Bitcoin closes today below $600, I'd consider shorts, but I'll take into account the overall market environment.

For the full version of this essay and more, visit Sunshine Profits' website.

Mike is a quantitative analyst focused on economic reality, not theoretical models. His investment thinking is grounded in empirical evidence and common sense. A holder of two master's degrees in quantitative methods and finance, he researches economic uncertainty, portfolio management, and investor behavior. At SunshineProfits.com he develops innovative investment tools, and is the author of the Bitcoin Trading Alert service.
No positions in stocks mentioned.
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