Last year was a rough year for Bitcoin investors. The currency that for so long has been able to stand up to pressure from governments, the banking industry and doubting economists, now appears weak and vulnerable. It seems that markets were quick to flip from being overly optimistic to writing it off almost completely. Some of the pessimists suggest that the boom-and-bust cycle of the crypto-currency is nothing more than the classic Dutch Tulip mania.
But bear in mind one of Warren Buffett’s favorite sayings: be greedy when others are fearful. Has fear of Bitcoin investments driven it too low too fast, just as enthusiasm drove it to record highs?
The clockwork behind Bitcoin
It may be tempting to submit Bitcoin to the kind of supply-and-demand of fundamental analysis one would apply to any other currency or commodity, but the fact of the matter is that Bitcoin really isn’t like any other currency.
Bitcoin, a virtual currency that is unattached to any political body, is not driven by the same circumstances that drive the US Dollar, for instance, which is controlled by political and macro-economic forces. Nor can it be compared to a commodity such as Gold, which is a finite resource with limited supply as well as limited demand. So what does drive the virtual currency’s value?
Like many other new and innovative investment instruments, Bitcoin is driven by headlines. Investors are willing to pay a premium whenever headlines suggest that Bitcoin is the next big thing, just as when the headlines suggest that the crypto-currency is a passing fad, a bubble or simply unsafe (the case at the moment), the currency will plunge regardless of how many Bitcoins are in circulation or whether or not the Dollar is falling. Simply put, Bitcoin is measured by investor sentiment, which begs the question: how can that sentiment be assessed?
Google’s insights on Bitcoin
If Bitcoin sentiment is driven by headlines, wouldn’t it be awesome if Google, the world’s biggest and strongest search engine, could provide you with some sort of insights on Bitcoin’s popularity? Well, we’re in luck, because Google’s “Trends” tool does just that. As you can see in the chart below, negative headlines, such as new regulatory restrictions in China or the bankruptcy of the Bitcoin exchange Mt.Gox, has brought searches on Bitcoin close to a record low.
At the same time, we can see that as headlines become more marginal, such as a negative quote by a public figure or some other less controversial news, the popularity of Bitcoin in Google searches does not continue to fall. In other words, perhaps with no real headlines, Bitcoin’s popularity has stabilized.
Has Bitcoin bottomed out?
So, is no news for Bitcoin good news? Perhaps it is; for the moment at least, bad headlines for the currency are petering out and Bitcoin’s popularity has thus far stabilized. If there is no additional bad news, this could mean that Bitcoin’s popularity could eventually increase again.
There is however one caveat: even if Bitcoin did start gaining favor among investors again, this time around both the popularity and the price of the Cryptocurrency would most likely increase at a more cautious and gradual pace. This, in and of itself, is good news for Bitcoin as sharp gains may provoke Bitcoin holders to sell, not to mention ward off less adventurous investors.
Having said all that, it’s important to remember that even if Bitcoin is driven by headlines, the trends in its value still have to be supported by price patterns, just as in any other asset. As you can see in the price chart below, Bitcoin seems to be nearing its potential bottom at 328.
If this price is indeed established as a strong support line, Bitcoin could start to recover, only this time without the dramatics. So stay tuned, as Bitcoin might just be on the verge of a quiet comeback.