Guest post by CMC Markets Singapore
Looking at the price movements of Bitcoin, any trader eyeing the currency will certainly have had the thought pop into their heads. The volatile price movements can be an exciting and attractive feature; however it is also a frightening aspect. Its volatility is derived mainly from the fact that unlike shares, forex or commodities, it is a product that it is entirely decentralised with scant operating rules and no regulatory body governing it.
For instance earlier this month in June. Bitcoin saw a drop of its prices from around US$640 to $600. This was not due to any traditional factors such as supply or demand factors but this was because GHash.IO, one of the largest Bitcoin mining pools, made it to 51% of mining power, rocking the entire Bitcoin market.
What this meant was that GHash.IO gained (at least temporarily) the ability to reverse Bitcoin transactions and even spend the same currency twice because it technically controlled the largest share of Bitcoins in the existence. Naturally, the Bitcoin community responded negatively to this, with some users selling off their holdings. The fall in prices was only stemmed on June 16, when GHash.IO came out with a statement in which it promised never to double spend or take part in a 51% attack on transactions. At the same time, several top GHash.IO miners agreed to leave the pool, thus lowering GHash.IO’s mining share to around 31%.
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This latest incident highlighted again the lack of regulatory oversight in Bitcoins. Earlier in the year, the sudden closure of one of Bitcoin’s largest exchanges, Mt.Gox, made headlines globally when it disappeared overnight with over 850,000 Bitcoins.
Critics will often point out that without a central body governing Bitcoin, there is nothing keeping more malevolent users of the currency from abusing it. While it probably was a relief to Bitcoin users everywhere when owner of a mining pool with 51% share decided to relinquish that power, there may not be a happy ending the next time.
What does this mean for traders? While there are large price movements in which to leverage off. It is hard to tell what forces affect Bitcoin’s movement, which mean that investing in it is extremely risky.
Some analysts believe that the general downward trend that has bedevilled Bitcoin’s value since late last year may be stopping, and we may see a movement back up. However if you look at it on other time frames, just as many analysts will tell you that the depreciation might not yet have come to an end, and that prices could slide as low as $500. Because both ends hold such significant risk, taking a short term position in Bitcoin would be extremely risky right now, because of the existing tensions in the current situation.