Bitcoin sees room to rise, but caution needed

Very briefly: we don’t suggest closing longs.

Today, we saw another article on Bitcoin on the Wall Street Journal blog. The piece is on the three key challenges ahead of the currency this year. The post argues these challenges are: regulation, adoption and volatility.

Regulation is important since, as we have stressed, it will be interesting to see how governments react to Bitcoin and what regulations will be put in place. For now, eyes are on the Internal Revenue Service in the U.S. and on any possible guidelines it may issue for Bitcoin.

Adoption concerns businesses that accept Bitcoins as payment for goods and services. Overstock, Zynga and TigerDirect have already made it clear that they will be accepting the currency. Small businesses the world over are also taking advantage of this payment system. On the other hand, we’re still waiting for more heavyweights to join the party.

Volatility is important both for the individual and corporate Bitcoin user, and for Bitcoin investors and traders. We’ve seen the currency to go to $1,200, to go down to $600, to jump back up to $1,000. Traders and investors might profit from such volatility but it also makes it hard for the currency to be a store of value and a reliable means of transferring money between countries.

It will be very interesting to see how Bitcoin stands up to those challenges in the nearest future. Now back to the currency itself.

On Mt. Gox, Bitcoin went up 4.8% yesterday on highest volume (btc 12,962.01) since Jan. 9. This was a second day of relatively strong appreciation on increasing volume. The first more significant move turned out to be to the upside and it took place over the weekend. Does this development make the future rosy for those of you who are long Bitcoin? Not necessarily.

Despite the move up, we haven’t really seen Bitcoin move beyond the recent trading range based on $800 (our stop-loss level and the dashed red line in the chart) and $1,000-1,100 (which coincides with the solid green line in the chart; yes, the currency closed Sunday above $1,000 but has since retraced). What do we make of this?

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