I've been holding Bitcoin since it was $10. In my view, Bitcoin has always been thinly traded because most people new to Bitcoin learn that they should acquire as much of it as they can afford to, and then withdraw all of it from a centralized service. For example, they learn that decentralized, trustless money can only be decentralized and trustless when there's no middlemen involved. Storing BTC on an exchange just invites back the middleman. Which is just not part of the narrative.
Because of this, Bitcoin exchanges have always lagged the market, and BTC-denominated trading volumes will almost certainly always remain small. The real demand comes from people who want to hoard all of it that they can. It'd be a lot like Pogs if it weren't for the sorry state of government issued currencies.
Can this drive more and more people to currencies backed by nothing and governed by algorithms? Any news that affects this picture, moves the price, often times significantly, e.g. China. So in effect, the price of Bitcoin moves on whether the dream of breaking free from government issued currencies worldwide can actually happen.
In order to buy Bitcoin, you pretty much have to get over the fact that the only sustainable demand could come in the event that public trust towards mainstream institutions continues to erode to the point that people at large no longer trust the money. Or no longer trust the money for other reasons. The people who bought into BTC early on for pennies, viewed the situation like this, and many of them refuse to sell. I've seen people try to claim half of all Bitcoins have been deleted from hard drives in the early days or lost, which I find unbelievable. Then again, having been involved in the Bitcoin space for several years now, there's very little left that I find unbelievable. There's an enormous amount of disingenous players, and it's completely cut throat actually. If you're crazy enough to get on board with Bitcoin, chances are non-zero that you're also crazy enough to do and say anything to take people's BTCs. Because really, the narrative states that the price of BTC can only go up as more and more people lose faith in government backed currencies. The whole concept of a currency is based on mutually shared delusions, so it's really not without merit.
To cut it short, this results in poor liquidity. I haven't run the numbers myself, but I very much doubt the BTC trading volume, as measured in BTCs, as done anything but gone down now that the price reached $1200. That _really_ got the early adopters dreaming.
I'm honestly become extremely jaded and cynical over the last year in particular. If you think the idea of cryptocurrency can't work, there's not much you can do besides short it or ignore it. The latter is really quite hard, because anyone, even someone with less than 1 BTC to their name, inevitably finds it worth commenting on Bitcoin stories, and submitting Bitcoin related news of their own on social networking sites.
Bitcoin exchanges are moving to reduce fees to zero and add leveraged trading, because that's all you can really do to offer substantial liquidity in a market where all of the "real" participants aren't interested in trading, or spending the underlying. There's just not enough trading activity. It goes back to the narrative. The sad part is most exchanges are shoddy or even outright fraudulent, see: MtGox (Mark Karpeles in all likelihood stole 850,000 BTC, and no i don't find this surprising in the least bit).
All of you coming at this from the angle of HFT are playing with fire. That's all I can say.
I'm not saying any of this is a good thing, quite the contrary. The price of Bitcoin is effectively determined by day traders, payment processors like Coinbase and BitPay with clientele that effectively accepts BTC and then dumps it on the market, along with the odd miner or newbie looking to acquire coins en masse. Not to be mean spirited, but what the heck. Everyone else doesn't matter, because they don't have enough money to affect the market.
Truly, the Bitcoin concept itself more closely resembles MLM / network marketing than any one traditional financial instrument.
Finally, anyone who has invested or lent BTC over even a short timeframe in the past two-three years will tell you that there's no incentive to invest or lend or spend BTC. It is what it is. The only interesting game is acquiring as much BTC as you can afford and then playing with altcoins, which are mostly P&Ds.
Maybe it's a racket, maybe Bitcoin is only useful to spend on illicit items. Even so, the fact that more and more people are becoming interested in the idea of a currency governed by an algorithm just goes to show how little trust there is in mainstream institutions. This is why I'm very begrudgingly bullish. I don't think anyone who day trades Bitcoin knows what they're doing. I think it's profitable to sell at the top of pure manic phases, but it's not worth doing that when you consider taxes and reporting requirements. Buy and hold BTC in a wallet only you control. This has always been the best option, and it explains the overall shoddiness of the Bitcoin exchange scene.