Bitcoin is a beautifully transparent market. All transactions are in the public domain. So last night I put together a chart of the USD market price of Bitcoins vs. "Days Destroyed" which is a measurement of Bitcoin monetary velocity. Here is the definition of Days Destroyed from blockchain.info:
Bitcoin Days Destroyed is a measure of the transaction volume of Bitcoin. If someone has 100 BTC that they received a week ago and they spend it then 700 bitcoin days have been destroyed. If they take those 100BTC and send them to several addresses and then spend them then although the total transaction volume could be arbitrarily large the number of bitcoin days destroyed is still 700.
The chart is interesting because it shows velocity tracking the USD exchange rate during the recent spike, however, now velocity and price are 180 degrees out of sync.
Here's my interpretation of this:
During the spike up, volume increased in a rush to trade in and out of Bitcoin. During the spike down, volume crashed as trading interest in Bitcoin diminished, and perhaps as exchanges such as mtgox were threatened and blocked by governments.
More recently, volume goes up when the price goes down. These are the weak hands exiting Bitcoin. As soon as the volume of weak hands starts to dry up, the price stabilizes and goes up for a while, then the weak hands begin to sell again, volume picks up, and the price heads down. This looks like accumulation, with strong hands waiting for the weak hands to cough up Bitcoins.
Note that the Bitcoin open source community is moving in the direction of limiting small transactions. This move will slow down the growth of the Bitcoin database and make the whole system more sustainable. Bitcoin will become a validation system for larger and larger "reserve" transactions. Various systems that hold Bitcoins in reserve will facilitate small transactions. So what do I expect to see with Bitcoin: lower and lower volume on higher and higher price. Looks like that trend has begun.
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