Over the past year, the price of bitcoin and other cryptocurrencies, with respect to the US dollar, have skyrocketed. For the most part, the increase in price has coincided with an increase in trading volume. However, since the peak in late may, trading volume for bitcoin has actually declined somewhat, even as the price has continued to grow.
On may 26, 2017 the 24 hour trading volume for bitcoin was roughly 913,000BTC. On June 11, 2017, 24 hour trading volume was only about 731,000BTC. Meanwhile, the price of a bitcoin, in USD, moved from roughly $2,560 to $2,900. This is a bit troubling. While increased volume would make an increase in price reasonable, a declining or even static trading volume suggests that it is just a matter of increased speculation.
While I have written that I think gold is superior to bitcoin, at least in most cases, I am interested in the cryptocurrency ecosystem, and I think that they have a long term place in our economy. What I am concerned about is the risk of short term bubbles resulting in the loss of significant investments by those who purchase bitcoin during such rapid periods of price expansion.
This kind of rapid expansion and contraction in price due to speculation has happened to bitcoin in the past. While those who put money into bitcoin at any point in the past have managed to recover any losses, if bitcoin trading volume does not pick up soon, I would consider that a good sign of a bubble, and would be very cautious about entering into any position.