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Bitcoin Trading Range Narrows


Bitcoin might be prone to sudden moves if big orders are placed now, but the short-term outlook remains unchanged.

On January 30, the Financial Crimes Enforcement Network (FinCEN) of the US Department of Treasury released two additional guidelines on Bitcoin. The first takes a stance on whether Bitcoin miners are to be considered money transmitters:

"To the extent that a user mines Bitcoin and uses the Bitcoin solely for the user's own purposes and not for the benefit of another, the user is not an MSB under FinCEN's regulations, because these activities involve neither 'acceptance' nor 'transmission' of the convertible virtual currency and are not the transmission of funds within the meaning of the Rule."

In other words, if you mine Bitcoins for your own account, you're not subject to regulations for money transmitters. The second ruling offers some insight as to whether companies investing in Bitcoin are considered money transmitters:

...[T]o the extent that the Company limits its activities strictly to investing in virtual currency for its own account, it is not acting as a money transmitter and is not an MSB under FinCEN's regulations.

This means that companies investing in or speculating with Bitcoin are not considered money transmitters. Why is this important? Because being a money transmitter adds restrictive responsibilities to your business operations.

These rulings seem to recognize that entities might want to mine Bitcoins for other money, and they might want to invest in Bitcoin without necessarily wanting to transfer money to other parties. This piece of regulation will most likely be welcomed by Bitcoin enthusiasts. It is also more proof that government agencies are hard at work trying to figure out rules for Bitcoin.

Now back to the market itself.

On Mt. Gox, Bitcoin went up 1.4% yesterday to end the day at $954.00. The volume was real tiny: 1,458.55 Bitcoins. Stagnant is the word for what we saw then. No moves, no action, and Bitcoin still seemed stuck at around $950.

Today, the action has been down, Bitcoin has lost 0.7% so far (this was written past 7:20 a.m. EST). The volume at 619.63 Bitcoins is almost non-existent and might turn out to be lower than yesterday. In combination with the barely moving price, not much has been going on today.

My firm has been writing about the lack of action in the Bitcoin market for some time now. But it seems that if we thought there had been no moves in Bitcoin earlier, the market is testing our patience now. Even compared with most of January, what's been happening since last Tuesday looks jarringly calm.

Since January 28, Bitcoin has, in fact, barely moved. That day saw relatively high volume (compared with the recent levels) of 10,017.57 Bitcoins, but in the following days, the trading subsided. These developments might be read as a situation in which the price-setting mechanism was tested on January 28, and investors were seeking a new price level following the more volatile period of January 25-27. There was no pronounced move, and the price settled around $950 and has been trading there ever since. But there is no certainty that this is what actually happened.

We've been experiencing a period of tiny ticks within a period of calm. I don't see the price as truly stabilized at $950. Neither do I think that there's no possibility of Bitcoin taking a sudden turn anytime soon. The amount of Bitcoins exchanged today up to the moment I write this is below $600,000. This might be a whole awful lot of money if you're an individual investor, but might be barely noticeable to spend for companies or even wealthy individuals. No, this is not about manipulation. The fact that the volume is so small warns us that it might be easy to swing the price one way or another, but my point is that at such times, even medium-size orders can visibly move the market without speculation in mind.

The current environment suggests that most of the appreciation/depreciation might take place in very short periods of time. On the other hand, these moves might be short-lived if they are not followed by more capital.

So far, nothing has changed. Bitcoin is still between $800 (dashed red line on the chart, our stop-loss level) and $1,000-1,100 (which is marked by the solid green line on the chart). The short-term outlook remains unchanged. If there is anything worrying, it might be the volume. A couple of bigger orders might start a new trend here.

It is unclear how long the current cooling-down period in the Bitcoin market might last. As my firm has written before, we would like to see at least one more swing at $1,000 before reconsidering our opinion on positions in the market. We're not seeing such a move at the moment, so there's no change in our take on the market just now.

Summing up, there's been almost no action in the market. This means that Bitcoin might be prone to sudden moves if big orders are placed now, but the short-term outlook remains unchanged, in my firm's opinion.

See also:

BitLegal Tracks Bitcoin's Legal Status Around World

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 he develops innovative investment tools, and is the author of the Bitcoin Trading Alert service.
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