The price of bitcoin increased yesterday following the news that PayPal would integrate the digital currency into its services for merchants. However, the price is still down approximately 50% compared with the start of the year.Everyone in the bitcoin space is now looking for answers as to why the price has dropped so much from its $1,100 peak in December 2013.
In the absence of any new specific information, the simplest answer is the best, and can be summed up in two words: asset allocation. Simply put, there have been better places to invest since the price started dipping from a relative high in June and July.
S&P 500, the Dow 30, and the US dollar have all outperformed bitcoin since June, but it’s really been the case all year, as the S&P is up 8.8% year to date, and the Dow is up 4.67% year to date. In other words, money flows to where it can increase, and selling begets more selling in what forms a classic negative feedback loop. As bitcoin keeps going lower, more selling will occur, especially among retailers and miners.
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The US dollar has significantly outperformed bitcoin since June and July. In fact, the US dollar and bitcoin should be negatively correlated as they are competing assets and ‘alternative’ forms of currency. If a stock market correction happens, money outflowing from equities will look for other asset classes to allocate to. Hence, money could flow towards under-performing assets, such as bitcoin, emerging markets and hard and soft commodities.
Some in the bitcoin community have speculated that the Alibaba IPO has been one of the reasons for the price decline. This could be seen as a positive, though, as all those who were allocated shares at $68 will probably be selling their shares after making a 32% profit very quickly and put that money to use elsewhere.
Bitcoin Financial News
If we look at bitcoin seasonality, the period beginning in October has seen the price rise in previous years. Perhaps that is a pattern we will see repeated this year.
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