An example of bad TA
/u/crazyflashpie posted a chart in /r/bitcoinmarkets today that happens to be the most-upvoted comment, which causes me to worry about the quality of those daily discussion threads. The chart, at https://www.tradingview.com/v/m1ZBdcbv/, purports to show an alternative bubble cycle theory. I want to examine several issues with this chart.
First, look at the purple lines that are supposed to show the lower boundary. You'll clearly see that there is a specific point where the lines diverge and growth accelerates. Obviously, this would be a significant point in bitcoin's history and would deserve discussion. Yet, crazyflashpie provides no explanation of what happened the day the lines diverged to show why there would be such a fundamental change to his model. This is an example of explaining away data that does not fit the model by adding more exceptions to the rules.
/u/moral_agent's model has held up well and continues to hold up, and requires only one lower boundary to explain the behavior. As I've stated before, things don't just happen for no reason. If you want to provide a credible alternative model, then you have to provide explanations as to why your model needs to be more complicated than his. A chart that cannot explain its own lines is not predictive of anything.
The case this was a "false" bubble
Several price behaviors recently have diverged from what we would expect during the uptrend side of the bitcoin cycle. In particular, there are a few issues worth mentioning:
1. Bad news is starting to affect the price again, while good news is having little impact (see how /r/bitcoin is again focusing on bank warnings)
2. The default trend is down, whereas in May the default trend was up
3. Indicators traditionally associated with a new bubble, such as number of wallets and Google searches, have not surged as would be expected
4. Transaction volume has failed to recover at the same rate as it traditionally has
While the cycle is traditionally ignorant of external events, there are also the following to consider:
1. The new ETFs, exchanges, and financial services are nowhere to be found, vaporware like Circle abounds, and there is no guarantee they will appear within 5 months
2. There is no new group of consumers that has been identified as being newly interested in bitcoins
3. Despite bitcoins being far simpler to use than they were six months ago, usage shows no sign of increasing
The second group of indicators is more an effect of the cycle than the cause of anything.
Go back to crazyflashpie's diagram and ignore all the lines, looking only at the price. Compare what happened at the top of each bubble (even the small false bubbles). Notice that there is a peak, followed by a crash, and then another lesser peak, followed by a slow bleeddown for several months. The pattern is more pronounced in the larger bubbles, but the false bubbles also show this pattern. Though there is not yet enough data to definitively call this as fact, one can make a case that a similar double top has occurred with the first top on June 5, and the second top on June 30.
The number of people who have been going long on margin in the hopes that this was a large bubble poses the risk for a continued fall as those people get wiped out by margin calls, or simply waste all their money in interest payments. I know that I do not have enough confidence to buy at the moment for any long-term investment, because I think that there will be better deals ahead. Bitcoins aren't dead, but I do not subscribe to the idea that there will be a bubble in September. The pattern, which has repeated many times before, shows more evidence every day that there is not a rise that the next bubble is more likely to occur 8 months from now and that this was a false bubble.
I think it will be interesting to see how this issue of terrorists using bitcoin plays out. News of a terrorist group using bitcoins has long been considered to be the greatest fear of many people. If it takes hold, then I think we have good confirmation the last bubble is over and we are in the downside of the cycle. I plan on theorizing on why some bubbles are these aborted "false" bubbles and some are true bubbles tomorrow.
The argument against lengthening cycles
The popular argument of the past few days seems to be that bubble cycles would lengthen over time. Crazyflashpie believes that cycles are lenghtening by 40 days per cycle, so that this cycle would be 40 days longer than the last. This theory is at odds with how technologies are adopted and how society advances.
Technology grows at an exponential rate. People seem to have difficulty understanding how things can speed up so quickly that humans cannot keep up with them. An article recently revealed, for example, that Google no longer understands how its image search algorithm works. The algorithm can now identify paper shredders in images. When humans are shown images with paper shredders in them, humans miss more shredders while the computers identify almost every single one. This is amazing because Google never programmed its image search to know anything about shredders. Nobody at Google even knows how they would write an algorithm to identify shredders in images. The machine has taught itself something that humans could not, and in just six months.
The amount of VC money going into bitcoins is far beyond what was invested years ago. The number of companies operating in and advertising across the industry is significantly higher. Given that the rate of change is increasing quickly in all other areas of bitcoins, it doesn't make sense to say that the price will have longer bubbles. Instead, you would expect it to have shorter bubbles, which shorten in period and flatten in magnitude as bitcoins become more widely adopted, and eventually merge into one steady trend without bubbles. You wouldn't expect there to eventually be a two or three year delay between bubbles. Consider what cell phones looked like two or three years ago.
Suppose we can define the amount of bitcoin technology in a single number. When there was 1 unit of bitcoin technology, it took a long time to get to 2 units. To get to 4 units from 2 took a shorter time, and so on. Now that big corporations are developing, it doesn't make sense that all this work will take longer to advance the technology to the next level. The rate of software development, and therefore the rate of bubbles, will shorten, not lengthen, as the capabilities and ways of spending bitcoin increase.
Worrysome transaction fees
I've stated before that a critical problem with the network at this point is the 1MB transaction limit and the rate of development. Today, we have some quantifiable evidence on the effect of these issues at https://bitcoinfoundation.org/2014/07/07/floating-fees/. /u/gavinandresen created a chart of how long it takes to get a transaction confirmed given a certain fee. As you can see, it takes 0.002 bitcoins to guarantee confirmation in the next block.
What people should be paying attention to is the fee for getting a transaction included in at least 15 blocks from now, which is as high as 0.0002, or 12 cents, for a 2.5 hour confirmation time. The fee for a 10 minute confirmation time is ten times that, at more than a dollar. These fees are clearly unsustainable for any practical usage at the merchant level. If I purchase a $12.00 book at Amazon, I would be paying 1% in transaction fees, as well as losing at least 1% in cashback bonus from a credit card. They would have to provide a 2% bonus for bitcoin purchases just to break even. If these fees go up by just a factor of five, which is reasonable, then Amazon needs to provide a 7% bonus to use bitcoins, which they simply can't afford.
This is why these problems are critical, and why the lack of developers fixing them is a looming catastrophe. The big bankers almost certainly look at this when they decide how to invest, which may explain why the hope associated with bitcoins has faded for now.
When something isn't selling well, you look at the product and figure out how to improve it. If the current bubble turns out to already have been a false bubble, then I think people need to examine what is wrong with the product. In this case, the issue may simply be that the product is going to be too expensive, and that needs to be fixed.
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- Days until July 24: 16