From the June 2014 issue of Futures Magazine • Subscribe!

Bitcoin: Currency or commodity?

Strategies and tactics for trading bitcoin?

Currently, more than 90 percent of bitcoin accounts are in a buy-and-hold mode. Those who came on before 2013 had a chance to experience exponential gains. At its height in November 2013, bitcoin hit above $1,000. It is now oscillating around $500. Regardless of the investment or trading goals of bitcoin holders, they all will need to make a decision to get out and exchange it for their local currency or a service provided by a merchant. Therefore, timing entry and exit will be important. Ultimately, all bitcoin traders will need to become currency traders.

Bitcoin traders have many challenges. First there is that of selecting an exchange or service to buy and sell coins. It is a virtual wild west with more than 50 bitcoin exchanges around the world. They are all relatively new. The trader has to wonder, “is that money secure?” As a result there is an extra counterparty risk to the bitcoin trader. Surely as new security protocols evolve the risks will be minimized and other players such as wallet companies will offer simpler ways of buying and selling bitcoins.

The challenges presented in trading bitcoin will, for many reasons, be much greater than trading currencies, gold or other instruments. 

First, bitcoin has no options market, making the discovery of the fair value more uncertain. Also, bitcoin’s price action is still very sensitive to disruptions by news and internet rumors. Traders therefore will confront a reaction-diffusion herding behavior generating disruptive spikes and surges. Until volume and liquidity conditions improve, classic tools of discovering price signals using technical analysis will have little value.

Bitcoin traders certainly will benefit from understanding price action in the major currencies. Clues on when to buy or sell bitcoin also can be derived by looking at how other virtual currencies or crypto cross-pairs are doing. The most appealing and liquid cryptocurrency cross-pair to trade other than bitcoin is LiteCoin/Bitcoin (LTC/BTC). Also at this early stage bitcoin trading systems are just starting to be released and are likely to be very inaccurate. The market for trading systems, and teaching how to trade bitcoin is wide open.

Clearly we are witnessing the emergence of a potentially new kind of underlying instrument that combines features of a currency and a commodity. Forex traders should keep an eye on bitcoin developments. Whether it will become an asterisk in the history of currencies or the beginning of a digital currency model is yet to be seen. Next time we will show examples of specific trading tactics for bitcoin.


Useful report links :

IRS treatment of bitcoin: 

www.irs.gov/pub/irs-drop/n-14-21.pdf

CoinDesk Bitcoin report: 

www.coindesk.com/bitcoin-2014-report/

Bitcoin pricing on Bloomberg: 

www.bloomberg.com/now/2014-04-30/bitcoin-now-bloomberg/

Planet Bitcoin’s complete list of exchanges: 

planetbtc.com/complete-list-of-bitcoin-exchanges

Block chain data: 

www.blockchain.info.com
 

Abe Cofnas is author of “Sentiment Indicators” and “Trading Binary Options: Strategies and Tactics” (Bloomberg Press). He is editor of binarydimensions.com newsletter and founder of Quicksilver Concepts Inc. (www.quicksilveralgos.com) an algorithm development company specializing in the gamificaiton of trading. He can be reached at abecofnas@gmail.com.

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About the Author
Abe Cofnas

Abe Cofnas is author of “Sentiment Indicators” and “Trading Binary Options: Strategies and Tactics” (Bloomberg Press). He is editor of binarydimensions.com newsletter and can be reached at abecofnas@gmail.com.

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