2011-06-04

Elliot Wave analysis of Bitcoin



Bitcoins are a digital currency with restricted quantity in order to keep their value. The price of Bitcoins was down around $1, but has recently exploded to more than $18 as the currency gains widespread media attention. Whether this is a one-time move or not—that's wholly dependent on how successful the currency becomes—but several mainstream articles on the currency appear to mark the optimistic and bubbly spike of a fifth wave higher.

Thinking in terms of a social phenomena that is expressed in Elliott Waves, odds favor this being a one-time spike, to be followed by a return to obscurity. Bitcoins are popular with a small portion of the population that understand how the system works. Media coverage has pulled in the bulk of the early adopters and there's unlikely to be enough buyers left to push up the price. This move will exhaust itself soon and the price will collapse in a Wave 2 correction. In order for the next move to take place (Wave 3), a new pool of users/buyers will need to emerge and this is where the rubber will meet the road. First, this pool will be much less sophisticated and they will need a reason to use Bitcoins...possibly some type of "killer app." Second, this second move will attract the attention of government because it will be far more conspicuous. Considering that there's already a "black market" that accepts Bitcoins and has a wide assortment of illegal drugs, an impossible conflict between one and two seem very likely. Based on history, I'd bet on black—the G men.

Disclosure: I have some Bitcoin that I generated by using the Bitcoin application.

Up-to-date charts are available at Mt.Gox.

An update to this post is available here.

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