About the last two days
There are a lot of people who are saying that the bubble cycle doesn't exist, that the pattern is fictional, and that you shouldn't make decisions based on it. Even stalwarts like /u/yruafraid were questioning whether the cycle is important. I need to devote a lot of time in this post to show why understanding the cycle is important. If you don't know of /u/moral_agent's bubble charts, then look at them and come back before reading.
Glad to see you back. Now, if you hadn't seen /u/moral_agent's charts, you would have been completely oblivious to the fact that the last two days was a significant departure from previous patterns. For what seemed like no reason at the time, the bull market suddenly stopped and started to slide downwards. There was no news, just a steady slide completely out of character with anything that has occurred before.
Nature, and humans, operate in patterns and based on precedent. The patterns continue unless something happens to change them. I used the example of the seasons before. Birds migrate north and south in the Spring and Fall. For many years, they performed the same migrations every year. Now, scientists are finding that birds migrate further north than they previously did. There are two things to note about this. First, the pattern isn't for the birds to stay in one place; the pattern is for the birds to move back and forth between two places unless something changes. The second is that scientists don't just ignore when something out of the ordinary happens. They try to figure out what has changed in the underlying fundamentals of the pattern to destroy the previous assumptions. In this case, scientists recorded carbon dioxide levels and most agree that global warming is the cause of the birds migrating further north.
Yesterday, I said in multiple posts and comments that the price was not making sense. The departure from the norm was radical and unexpected. There have been few times when the price of bitcoins has a steady slide during a bull market; the price always either rises steadily or experiences huge crashes. That's why I started to suspect that there was something that people knew that I didn't know. At one point, I wondered whether it was a good idea to sell, because you should never invest in something that you don't understand. I was worried that a protocol flaw had been discovered, but fortunately the cause turned out to be a non-issue.
People will likely criticize this post more than any of the others I've posted, but you can't make money unless you identify what the steady state of the market is. Bitcoins are not governed by random chance; there are people making decisions on when to buy and sell based on a number of fundamentals. When that pattern starts to deviate, you then look for the reason why the deviation is occurring. If you can't figure out why, then **change doesn't happen for no reason**. There is something you don't know and you should start to get worried about what the other people know that you don't.
/u/zilvars666 heavily criticized me for suggesting yesterday that I needed an exit point, but when things suddenly and inexplicably start to deviate, the correct course of action is to question whether other people know that your fundamental assumptions are inaccurate.
Margin traders got killed yesterday
At bitfinex, longs outnumbered shorts by an unbelievable number yesterday. Part of the explanation for that huge crash after the news was announced was undoubtedly that 2.5:1 traders were closed at a 100% loss. The "market sentiment index" at bitfinex declined significantly as the event unfolded.
Seeing that, I purchased bitcoins in the evening, and made money overnight. I think a good rule of thumb in the future might be to keep an eye on bitfinex, and whenever there are a lot of long traders, buy in immediately during any crash, because those people are probably going to look to get back in if they can, even if they take a total loss.
The government getting rid of bitcoins is the greatest boon for decentralization?
/u/physalisx pointed out yesterday in /r/bitcoin that the greatest boon for bitcoins is that the government has now reduced its position significantly. I won't link to his comment because it is profane and I prefer to keep these posts family-oriented. He pointed out that the government was and still remains the second-largest known holder of bitcoins. Libertarians who like bitcoins for their freedom from government interference will welcome this news as a way to create a more egalitarian distribution.
Myself, I disagree. The people who are going to buy these bitcoins will be huge investment banks. I've already talked about my experience with insurance companies and how I know of nobody who has truly been sick who would prefer to deal with UnitedHealthcare over the government. When bitcoins go up in price, bankers are going to be the ones who benefit. While the government has a lot of problems and sharing power with everyone is the ideal, if I were given a limited choice I would rather the government have wealth than have bigshot Wall Street CEOs buying jet planes and creating a new banking empire based on bitcoins.
Look for a huge run
I predict a huge run as this auction approaches. This will be an interesting experiment that could be unprecedented in the economics literature. Has there ever been a currency where such a huge proportion was announced to be sold at a certain time and where the bidding process will be transparent to everyone? The data from this will be poured over for quite a while to come.
This bidding process is interesting for quite a few reasons. First, the deposit required is $200k, which at current prices is about 10% of a series A block. If the price of bitcoins falls 10% between the close of the auction and the payment date, then some bidders will choose to lose their deposits and the government will have to hold another auction.
Second, there is no better seller than the government. Wall Street executives who don't want to send money to BTC-e will be willing to pay a premium to deal with a trusted seller, raising the price.
Third, it is impossible to obtain so many bitcoins on the open market without raising the price thousands of dollars. If Wall Street is trying to acquire a stake, the price of those blocks is not going to be $600. It will be somewhere around the average purchase price of 3000 bitcoins on the open market, which is far higher than $600. Given that the government is a trusted seller, there may be a premium even on that price.
This is not another off-market sale where someone contacts an old miner and signs a non-disclosure agreement. Here, everyone is going to find out exactly how much Wall Street is willing to pay. This will be a good measure of the value they place on bitcoins. If it is high, the markets will skyrocket and bitcoins will have gained legitimacy because the government sold them at a high price.
Finally, the sale date will be extremely volatile. Daytraders will be able to get rich or lose their life savings. The auction technically begins at 6am, but no bank is going to submit a bid until minutes before the 6pm deadline. In the meantime, they may discover they can get those blocks cheaper on the exchanges and buy them rather than bid, causing other people to take profits and cause spikes and crashes. I wish it were happening on a weekend when I would have time to watch.
Other
- Days until July 24: 42