What’s Bitcoin?

There has been much media hype and frenzy over Bitcoins, likened to the gold rush in the 19th and early 20th centuries. Bitcoin is a peer to peer network launched in 2009 after the Global Financial Crisis, that allows for the proof and transfer of ownership, without the need for a trusted third party. Just as cigarettes are used in prisons as a currency, a unit of Bitcoin, or BTC, can be used to make payment directly between buyers and sellers. Some companies that are accepting BTC as a currency are Wordpress, Overstock.com, Zynga, Tesla, Virgin Galactic, Reddit and OKCupid.

Number of Transactions Per Day

Source: blockchain.info

What’s so Great?

The concept of Bitcoin “eliminates” centralized control and lowers transaction costs as a result. The network is based on a mathematical proof; people around the world called "miners" use software programs that follow a mathematical formula to produce bitcoins. All bitcoin transactions are recorded in the "block chain" – a massive and transparent ledger of each and every bitcoin transaction maintained by the miners, so nobody can “double spend” each unit of bitcoin.

Use at your Own Risk

Singapore is now home to two of Asia’s first bitcoin ATMs, which will allow users to feed in Singapore dollars and buy the virtual currency. The Monetary Authority of Singapore (MAS) advised caution when dealing with virtual currencies as these are unregulated and consumers may not have legal recourse should there be problems. MAS also warned that the value of a virtual currency such as Bitcoin can fluctuate greatly within a short period of time.

Source: bitcoinaverage.com

Traders Rejoice

Hey, if anything moves, traders have a chance to take a position. Bitcoin has been compared to stores of value such as Gold, as well as global markets such as Forex. Still in its infancy, Bitcoin is certainly not the most liquid market in the world. It is not always a continuous market so spreads can be significant. However, this market is getting more liquid, transparent and easier to access.

Source: bitcoinity.org

Open for Retail Trading

There are numerous platforms for individuals interested in buying and selling Bitcoins. One such example is BTC-E, which is among the top five exchanges by volume. It has recently launched the MetaTrader 4 platform for Bitcoin, a familiar interface for many traders. If BTC-E proves successful with their MT4 offering, it could lead to them partnering with established forex brokers, where BTC-E provides bitcoin liquidity on their platforms.

Technical Analysis

­­­­­With a highest volume traded of just 3.26 million BTC per day, it will be a stretch, in our opinion, to use any form of technical analysis on Bitcoin trading. The above second graph however, seems to imply a support level at the US$500 level, and as of this article, prices are headed towards the support line. That said, we are seeing commercial automatic trading systems and expert advisors entering the market, such as Fapturbo 2.0′s MT4 forex trading robot, which seeks to profit from Bitcoin price action using technical analysis as shown below.

Source: fapturbo2.com

Fundamental Analysis

To us, investing in Bitcoin is more of a fundamental game, for those who believe its demand will exceed supply. The Bitcoin ecosystem was designed to allow an arbitrary maximum of 21 million bitcoins to be created at a limited and predictable pace; the amount of computer power devoted to mining will not change the pace at which they are created. All bitcoins are anticipated to be mined by 2140; after which it is assumed that transaction fees alone will be sufficient to motivate miners to perform the service of maintaining the block chain. While the supply side is easy to quantify, sustainable growth in demand is more tricky to establish.

Significant Risks in a Bitcoin Bet

There are numerous risks in a Bitcoin investment, which ties in with the profit opportunity. If Turkey can attempt to shut down Twitter, you never know the extent of regulation that may engulf the Bitcoin economy. Increased regulation can push up the transaction costs of Bitcoins, making it a weak substitute for traditional currencies. We should also expect resistance and competition from traditional money transmitters such as credit cards, banks and PayPal, as they respond to this new kid on the block.

In conclusion, risks present opportunities. The volatile and low correlation nature of Bitcoins could offer interesting diversification in an investor’s portfolio. With time, technical analysis will be more sensible, and various stakeholders can better quantify the risk to reward of such an investment.