Bitcoin Ends January Up 51%, Largest Monthly Increase Since 2011

For the month of January, 2013 the closing price of $20.41 USD was up nearly seven dollars from the 2012 year-end close resulting in more than a 51% increase for the month — Bitcoin’s largest monthly gain since December 2011. The one-year gain, calculated from the January 2012 close of $5.48 is whopping 272% and is illustrated in this chart of month-end closing prices:

January was a good month for other assets including stocks, the precious metal silver, and WTI crude.  However not only did Bitcoin trounce them for January 2013, it dominated over them throughout much of 2012 as well:

To help further illustrate the dramatic rise, charted is how much of an ounce of silver is needed to buy a bitcoin, beginning fourteen months ago (underlying data).

Mining

The 111,100 bitcoins issued which Bitcoin miners took in during the month is valued at $1.72 million using the average daily valuation for the month of $15.49. Miners had been suffering ever since the block reward subsidy “halving” that occurred in November last year.  With this spike in the exchange rate mining profitability for GPU miners is again at respectable levels,  However that will soon change again now that there is at least one ASIC mining hardware manufacturer that has begun shipping.

Mining results will vary based on the Bitcoin mining difficulty, with automatic periodic adjustments that re-calibrate production so that it resumes at the targeted rate. The biggest adjustment to difficulty in 2012 was under 15% and at the end-of-year the difficulty was not even three times the level it was at when the year started.  ASICs have the potential to do that same level of an increase (tripling) in just a matter of a couple months.   A dollar’s worth of ASIC hardware performs hashing at the rate that is nearly two orders of magnitude over what a dollar’s worth of GPU hardware does so we are likely just a couple months (or less) away from seeing the end of any GPU mining that is profitable.

Investor Interest

The total value of all bitcoins issued as-of the end of January (a metric that some refer to as Bitcoin’s “market cap”) is a number just under $220 milliion USD, more than $75 million greater than where it started at for the month.  Certainly greater demand occurring due to Bitcoin gaining traction as a payments and money transfer system is partly responsible for a higher valuation but there appeared to be no massive jump that would account for the need for an additional $75 million worth of the currency.  Thus a significant portion of the rise can only be attributed to speculative interest.

An attempt to quantify how much of a valuation rise was necessary to accommodate the rise in the use of bitcoin for transactions would require reliable data on the behavior of consumers who use bitcoins.  Those procuring bitcoins for use in money transfer or for paying for purchases do impact the monetary velocity of the currency in a way much different from how those who are acquiring bitcoins for long term investment or for short term speculation even.

If this velocity metric has been studied, the results have not been shared publicly.  What is shared publicly is transaction data that crosses the Bitcoin network.  However since that data is both pseudonymous and  includes indistinguishable “change transactions” which are sent back to the party making the payment, very little information about Bitcoin’s economy can be reliably gleened from it.

Most bitcoin market exchanges provide feeds with trading results in real-time and many volume records were broken in January.  Additionally, several bitcoin-related companies have started sharing their results.  The numbers coming out include BitPay’s announcement of having processed 10,000 transactions cumulatively from their 2011 launch through mid-January.  Other metrics include impressive volume and growth numbers coming from online casinos — the first industry that cannot ignore Bitcoin.

Early in January Bitcoin Foundation executive director Peter Vessenes published his Quarterly Update in which he describes an increasing level of interest from investors and shared his prediction that in 2013 there would be Bitcoin “liquidity problems” (price increases).

January Effect?

With Bitcoin trading markets only having existed for a few years there isn’t enough data to conclude that there is a seasonal trading pattern.  In 2012 the exchange rate dropped in February after a strong couple of months prior but then stayed level for a few months after that.

Those buying or holding bitcoins are trusting that Bitcoin’s current scalability problems are about to be resolved, that its exchanges are handling security better (the successful January hack against VirCurEx barely slowed them down), and that Bitcoin will not immediately see intervention by governments (being completely ignored by them is probably a temporary, one-time bonus).

But Bitcoin remains an experimental currency.  As the software gets poked and prodded, new vulnerabilities are discovered.  Some vulnerabilities will result in funds being lost while others — initially appearing to be quite scary will receive further analysis and be found to be inert.  But most bitcoin users and investors and  aren’t going to be monitoring chat channels or forum threads to determine if an event has occurred in which selling some coins would be a wise move.

Yet tremendous upside may remain that could be overshadowing the risks.  Payments startups like Square, Stripe, Braintree, Dwolla and mFoundry aren’t publicly traded so their shareholders mostly consist of angels and venture capital investors.  When any of these startups hits a “home run” (their product succeeds tremendously, or the organization is acquired, or they go public) it is the founders and shareholders who enjoy the tremendous financial gains.  When a SatoshiDICE, BitInstant, CoinBase, or BitPay (all angel- and venture capital-backed Bitcoin-related startups) hits a home run, every person holding a bitcoin likely sees a rising valuation due to the increased demand for Bitcoin as a currency resulting from that startup’s success.

Bitcoin speculators also could benefit from another characteristic of the nascent digital currency.  Without Wall Street’s participation there are few affordable methods to take a short position or to perform price hedging.  Without this relief valve, wild volatility occurs as the market tries to discover Bitcoin’s price.  It could go high, “really high” explains Trace Mayer of RunToGold.com.

With the last edit before publishing this monthly summary being composed nearly a week into the month of February and the exchange rate continuing to rise past the January close, there could be much more left to this rally.

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