Bitcoin Exposed: Today's Complete Guide to Tomorrow's Currency (9 page)

The other trends - primary and secondary - are both harder to call and often provide a more limited profit. We will cover how to determine those trends briefly, but first we should look to understand the millionaire maker, a.k.a. the macro or secular trend.

The short answer is: Up. Bitcoin is designed to rise in value on average, every year.

Bitcoin has several forces going for it and increasing the exchange value over the long term:

1. Almost all national currencies are vastly out “printing” Bitcoins. There are about 12 million BTC's as of this writing, while the Federal Reserve creates over $85 billion in USD's for buying government securities every month.

Simply taking an approximate value for the total U.S. currency in near circulation divided by BTC gives a staggering number of the potential value for $/BTC.

M2 is a mid range predictor of the currency available for transactions in the U.S. M3 is the broadest but discontinued form, while M1 is more descriptive of cash on hand. M2 sits at about $10.5 Trillion per Federal Reserve reports.

If only 10% of M2 funds went into BTC, that would be about $1 Trillion.

This looks like:

$1,000,000,000,000/ 12,000,000 = $83,333/BTC

Yes, it is extremely unlikely that 10% of M2 will find it's way into BTC. More likely, and currently happening, is that the number of BTC world-wide participants entering the market grows monthly. So, all we really need is 1% of the world-wide M2 value including the active traders in Japan, China, Russia, Europe, and Africa. Bitcoin will soar in value over time, unless either an exchange default, or a government decisively takes it down.

2. Bitcoin is worldwide. Almost 70% of searches for the word Bitcoin come from outside the U.S. Asia drives a lot of the Bitcoin trade; Asia is growing much faster than the U.S. Anything tied to Asian growth, will outperform national centric growth patterns.

3. Increasing taxation and confiscation across the world will drive citizens toward anonymous currencies that have no centralized controlling institution. Many investors in Europe, the U.S, and Asia watched in horror as Cyprus banks and the government stole up to 60% of some bank accounts.

Bitcoin wallets avoid this confiscation threat altogether. There is no bank that can close our Bitcoin accounts or wallets. We can choose to keep our Bitcoins on our computers or USB drives or even memorize them. Bitcoins were designed for just this situation: the need for a private, decentralized, potentially anonymous (hence nontaxable) unit of account, safe from confiscation.

4. More and more stores are accepting Bitcoins. Numbers are hard to come by on the acceptance rate (over 1000 stores), but already there is a core of stores that translate the virtual value of BTC's into hard goods. With that translation, BTC's gain credibility and utility. When BTC's stabilize more over the $100 point, it will be easier for stores to transition into accepting them.

Wild swings in BTC exchange rates made pricing goods difficult for merchants. Also, with a limited stock of BTC's circulating, there is not enough demand as the user base is limited. When bitcents are traded and even microbits and lower denominations are more common, then the distribution of BTC's can spread. Wider distribution will mean more customers with BTC's to spend, leading to stores meeting the demand.

Already nightclubs such as EVR in New York City accept Bitcoins with a phone app. Trend setting merchants such as this will bring Bitcoin all the popularity needed to close the gap with traditional, centralized currencies.

5. No significant competitor can challenge Bitcoins entrenched user base, which has been developed over 4 years. Already the Bitcoin competitors are gathering funding and moving in to take over. They will have trouble succeeding because their benefits are marginal, and they will have to build a new user base. We will discuss the future of Bitcoin and possible competitors in a later section.

All the above factors will send the general trend for Bitcoins relative to national currencies steeply upwards. This trend will continue for many years, possibly as far as 20 years, until there are conflicts within the currency system.

We can then buy the long-term trend and sit tight while our wealth increases, when comparing BTC to our national currencies.

For primary and secondary trends, the simplest trading methodology is also one of the most effective.

The chart below (found on
http://www.Bitcoincharts.com
) shows a 4-month price window of closing prices, with exponential moving averages from 10 and 25 days and the purple or shaded portion represents Bollinger bands:

What we are looking for are extreme moves where the short-term trend moves significantly beyond the longer-term trend. This tells us that a bubble or reversal may be at hand.  A perfect example occurred during the April 1-11 time frame. The chart shows with the Bollinger bands, and the two exponential moving averages shown by the brown and purple lines (the 10 day is almost always above the 25 day EMA line for those with black and white readers), where the danger zone happened. All experienced traders knew there was a steep collapse dead ahead.

At the Financial Survival Center (
http://www.financialsurvivalcenter.com
) and
@financialsurvvl
twitter feeds, there were warnings saying to sell out of BTC immediately. When the price leaps outside of the upper bounds of Bollinger bands, and the short term EMA moves much higher than the long term EMA - jump off the BTC ride into a national currency.

Conversely, when the BTC value dives deep into the Bollinger bands, and the short term EMA crosses below the long term EMA line, there is a good opportunity to buy shortly. Then we can ride the short term EMA back up as it re-crosses above the long term EMA.

The main reason we can make these trades confidently is that there is a fixed amount of BTC's in the system. That gives it a strong upward trend bias. We also know that when there is too high of a price spike, the down move will be swift and relatively short-lived. All of this knowledge stems from our most important call – in which Bitcoin is in a secular bull market against all national currencies.

This is all manual trading. More automated trading uses key techniques such as:

- Stop Loss orders (for selling based on a triggered loss level)

- Stop Age (time based selling)

- Target Price (buying or selling based on reaching a price)

- Buy Order Protection (forces over priced orders to below current market rate)

The stop loss and target price tools are the most critical. With a high beta market, the stop loss should be set as high as 20% or even 25%. Lower beta markets can use a 10% stop loss, or what is known as a tight stop loss. This translates to buying in at $100 and setting a stop loss at about $80.

While there could be much more written for covering other trading techniques, this basic knowledge will suffice. We can spot the too highs and too lows for selling and for buying. That is all we need to do for making a handy profit with Bitcoins.

For those interested in learning more about trading any currency or market, the challenge is there are
too
many books or courses available.
Financial Survival Center
has a free newsletter for trading, general investing, alternate income, and alternate currency investing.

Bitcoin Application Development

The trend for Bitcoin trading leads toward trading robots. While we might consider this a threat, it can be the saving force for Bitcoin. Bitcoin suffers from high volatility or Beta as explained earlier. Trading robots can reduce this volatility. Trading robots, or software, that tie into trading exchanges via Application Development (Programming) Interfaces, will make frequent small trades when there is movement in the market either up or down.

These frequent trades for small gains (and losses), are called scalping trades. They steady the market considerably because price movements immediately result in buys or sells against the move.

Mtgox.com has automated trade platform API's with two forms:

- HTTP API

- Streaming websocket API

All relevant trade information can be accessed through these protocols for trading.

There have been a few free trading bots written in PHP, but they were pulled off sites quickly. A robot that is consistently profitable is worth a fortune.  The essence of what makes the robot work is being able to spot the price trends instantly, execute instantly, and avoid significant losses.

There are downsides for trading software robots. They can crash a market when they gain too large a market share.  This is partly what happened in the famous Oct 1987 Black Monday crash. Mutual funds triggered excessive selling with computerized trading platforms.

Future Of Bitcoin And Alternative Currencies

“He who refuses to embrace a unique opportunity loses the prize as surely as if he had failed.”

William James

Opportunities And Dangers Ahead

Here is MtGox.com's traffic estimation chart for only U.S. web access:

Going from 5k unique visitors per month  (UV) to over 25k UV shows that the future looks bright indeed for both Bitcoin and mtgox. We would see even greater growth from international web access graphs. The majority of Bitcoin users are coming on board from outside the U.S.

Opportunities being seized and presented to the market place include:

1. Physical forms for Bitcoins with bitbills, Cassascius, and others.

2. A myriad of applications for Android, iPhone, iPad, Windows, and the tech favorite, Linux.

aCurrency, an Andorid app for currency conversion now links to Bitcoins. Bitcoin Wallet for Android and many others allow Bitcoins to be used almost like a credit or debit card, from our phone. Either we scan in our Bitcoin address and wallet information from a generated QR code, beam it, email it, or go through a web interface (plus other types of withdrawals not yet fully functional).

3. Merchant services from bitpay, OkPay, MtGox, Dwolla, etc. are making it easier for merchants to accept and cash out their BTC's.

4. Trading platforms are springing up to relieve Mtgox of its dominant role. Mtgox is not universally approved of because it has stopped trading at the most critical points, and often has lower prices.

5. There are also a host of competitors on the horizon. Ripple is the biggest and best financed so far.              

Produced by a company called OpenCoin Inc., Ripple is based on similar concepts to Bitcoin. Ripple is open source and distributed around a network exactly like Bitcoin. One of the key differences is that there are already about 100 billion ripples in existence, but they are fed into the system on a controlled basis.

It also uses something called social capital for backing financial capital. Plus, it has trust features for selecting networks to use for payments or transfers. What has the Bitcoin world suspicious though, is that OpenCoin Inc. is backed by large Wall Street venture capital firms.

Ripple has betamax stamped all over it. Bitcoin is working, out of the gate sooner, belongs completely to a voluntary community, and is not affiliated with Wall Street interests.

Other digital only competitors include Litecoin, Lucre, OpenMoney, OpenCoinage, Voucher-Safe, and many more.