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Analyzing the Analysts that are Analyzing the Bitcoin Price

The price of Bitcoin is dropping. Naturally, people want to know why and so they look to the Bitcoin news websites and subreddits for information. On these websites, there are people who claim to be Bitcoin trend analysts; these people look at graphs of Bitcoin prices, make trend lines, and then use these trend lines in their attempts to predict the future and prescribe action for Bitcoin enthusiasts. But these “analyses” are rarely reasonable and are almost never accurate in their predictions. This latest round of price drops has not brought any change to this community.

When the price first started falling from the $630-650 wall that was established last week, I saw one particular “analysis” that really agitated me. The price of Bitcoin had fallen from the $640s into the mid to high $630s within a timespan of two days– if I remember correctly. This person looked at the week-long price charts, stated that we were on a downward spiral in prices– claiming that we would return to the mid $400 price range– and encouraged all of his readers to sell, sell, sell! He said that they should sell everything and buy back in when the price found a floor so they could profit even more once the price went back up. At the bottom of the article there was a disclaimer; it stated that he was heavily invested in Bitcoin. So, there is no need to speculate on why he wanted everyone to sell, which would drive the price down further! If we did return to a price of approximately $400, lots of people would buy in and the price would skyrocket once more, and this man would have made huge returns on his investment. He must be in a pretty deep hole with his Bitcoin investment if he is using his position as an “analyst” to make attempts to manipulate the market to his favor. Setting aside the purely untenable methodology this man used in his analysis, I am appalled that a person would so unabashedly abuse his position as a writer at a decent-sized Bitcoin website to make an attempt to tip the scales in the direction he desires. I personally do not pay any attention to any of these so-called “analysts” for these very reasons; extremely flawed methodology and questionable motives definitely do not make for trustworthy financial advice.

Bad economics and intellectual dishonesty will have to be stopped if Bitcoin market analysis is to become a legitimate source of information for Bitcoin investors and enthusiasts. Most of the people conducting these trend analyses ignore the core tenets of the general economic theory. They do not consider human action, causality, and their logical conclusions when drawing these trend lines and extending them far into the future. They mainly adhere to the positivist philosophy of economics and rely solely upon statistical models and equations that only have relevance within the realm of the evenly rotating economy, a theoretical economic state whose conditions carry no weight in the real world. I discussed the importance of causality in a previous article and showed how a simple causal connection between the human desire for leisure time and the occurrence of a major national holiday produced a few days of stagnant trading on the Bitcoin markets.

A More Logical Reason For the Bitcoin Price Drop

Since I am on the topic of causality and its place in economic methodology, allow me to offer my own opinion on why the price has been dropping. We saw a huge spike in the price of Bitcoin immediately following the announcement by Dish Network that they would be accepting Bitcoin as a viable means of payments for their services. This jump in prices accelerated an already established upward trend in the value of Bitcoin, which occurred as a result of a steady stream of good news in the Bitcoin community. Now, let us take this information and apply it to a more recent event that is seemingly unrelated to Bitcoin, by doing this I think that we will gain some valuable insight about the cause of the currently declining price of Bitcoin. For the past two or three days, the news has been covering a rapidly declining state of affairs in Iraq. An extremely radical offshoot of Al-Qaeda has captured several cities in Iraq and is reportedly closing in on Baghdad. In response to this activity, President Obama announced that taking the US military back into Iraq to fight off these insurgents is not out of the question. The stock market reacted very negatively to this news; today(June 12, 2014), the Dow Jones Industrial closed down 109.7 points. Now, with this information in mind, we can look at the substantial decline in the price of Bitcoin with a little more clarity. It seems as though the Bitcoin markets are fluctuating concomitantly with the stock market, which usually does not happen. From this, we can conclude that the Dish announcement brought in some mainstream stock market players, and now they are selling bitcoins just as they are selling stocks. Combine that datum with the recent fear over Ghash.io coming close to attaining 51% hashing power, and we get a pretty reasonable hypothesis for the cause of the falling Bitcoin price that has been happening over the past few days.

I am not saying that there are no individuals out there who employ sound methodology when conducting trend analyses, I just have not seen any yet. I have never seen anyone adequately employ reasonable economic thinking when they draw their trend lines, they merely run some numbers, draw a line on the chart, and make a prediction for the long-term future based on the assumption that all the factors determining the price of Bitcoin will remain equal. The Bitcoin community could definitely use a dose of professionalism and sound, logical economic theory. Sure, the guy I talked about in this article has been right so far, the price of Bitcoin is still falling as I type these final words. But that does not absolve him from the painfully erroneous methodology employed in his analysis; a broken clock is still right twice a day. There is no telling when this decline in price will stop. I believe that the price will flatten out once all the mainstream traders who came in because of the Dish announcement stop selling and the news calms down about Iraq. Plus, as one of our writers said, it seems unlikely that a 51% attack will occur even if Ghash does achieve 51% hashing power. Per the reality of causal relations, a volatile political and economic climate produces volatile fluctuations in the value of anything being traded, this is a very valuable lesson the Bitcoin community should absorb and consider when conducting trend analyses in the future.