An Analytical Look At Bitcoin's Decline Through 10/5

There has been a lot of speculation as to the cause of the recent slide in BTC prices against USD in the period through 10/5. Seeking Alpha, the New York Times, and TechCrunch, have all weighed in on possible reasons for the slide. However, none of the articles I saw delved into the public market data to try and better understand how some of the drivers contributed to the price action they observed.

While several of the articles mention merchant adoption as a contributing factor, none explain why it is possible how such adoption would contribute to a price decline. Using Blockchain.info's estimates of the USD value of on-blockchain transactions between 8/7/2014 and 10/5/2014 shows a relatively narrow range between $30M and $78M of daily volume over that period--with a rapid increase from $45M to $66.6M and 119k BTC to a 60-day high 226k BTC between 10/2 and 10/5. Since much of the speculation occurs on exchanges in off-blockchain transactions, it is possible that this on-blockchain transaction volume is reflective of an increase in demand for conversion of BTC into tangible goods. This is a possible contributing factor to the recent decline.

Another contributing factor is the relative strength of the USD against global currencies (broadly speaking). Since observers have been commenting on the USDBTC currency pair, it makes sense that a strong USD would reduce the relative value of BTC. However, Google Finance shows that the euro has only declined ~10% relative to the dollar between 8/7 and 10/5. Since the beginning of October, there has been only a small amount of relative appreciation for USD. Clearly, this is insufficient to entirely explain the wild swing in BTC.

I believe that limited liquidity and margin calls are exacerbating the decline from the aforementioned factors. Bitcoin is extremely illiquid (BitStamp is ~10% of total exchange trading volume in BTC, and turned over only fewer than 3,500 BTC a day over each of the last 30, excluding 10/5. 35,000 total BTC daily liquidity implies that it would take roughly an entire year to turn over the full "market cap" of Bitcoins currently issued and outstanding). However, companies like Bitfinex have allowed users to trade on 2:1 and even 2.5:1 leverage. It is not surprising that 10/5's trading volume on their exchange was abnormally high, presumably as some of these margin trades are being unwound, compounding the selling pressure.

Trading volumes were also elevated on non-leveraged exchanges, like Bitstamp. Loss of confidence in BTC as a value store, panic selling, and bargain hunting are likely contributing factors.

While the price has rebounded off its lows, the volatility has probably been jarring for many BTC investors.

Lenny Grover is the Founder and CEO of FinToolbox, the creator of the ultra low cost, institutitional quality, Screener.co Equity Research Platform.

NOTE: This story was originally published on LinkedIn.