Back in January, I wrote a piece here that was headlined "Is Bitcoin's Collapse Finally Coming to an End?"
Not to brag or anything, but when that was published, the Coindesk Bitcoin Price Index (BPI) was just above $3500, making that prediction that a bounce was coming a reasonable one now that the BPI is over $8,000.
I said at the time that my relative silence on the cryptocurrency in the months preceding that article was based on my Mom’s advice to say nothing if you couldn’t say something nice, as I had written in July of 2018 that the speculative interest in the currency made a selloff from the $8,000 level at that time “extremely likely” and had no interest in piling on as BTC dropped.
Now that we are back at that level, a drop once again looks to be on the cards, so, with apologies to my Mom, BTC/USD looks set to fall again.
The reason this time is different, although related in some ways. That call lower last year, and indeed the call for a recovery in January, were contrarian views based on market sentiment. Back in July, BTC had garnered interest from some very high-profile, big-money investors. As I pointed out then, that made it vulnerable, as it resulted in a few concentrated positions in a relatively illiquid market that could be squeezed out. Once they were and we stabilized at around $3,500 however, the squeeze could be applied the other way.
The thing about both of those calls is that they had nothing to do with any intrinsic value, or lack of it if you prefer, in the virtual currency. They were based on a trader’s analysis of market conditions, and it is another variant of the same thing that leads me to believe that the BPI is headed lower again: a technical read of the chart.
Until quite recently, technical analysis of bitcoin against the dollar (BTC/USD) was not really a viable option. The extreme volatility that we saw back then was driven by passion, not logic. True believers saw the potential for collapse of regular fiat currencies and were attracted by the decentralized, peer-to-peer nature of cryptos, while the detractors failed to see any value at all in something that was based on “nothing.”
In reality, as I pointed out many times when I wrote regularly on the subject, neither of those extreme points of view were valid.
The inflationary nature of regular currencies such as the U.S. dollar and the tendency of governments to inflate their way out of debt did create some value in BTC, but the complete collapse of global finance, if it ever comes, is still too far off to be of any concern to anyone living now.
The critics’ view, that there is nothing behind it and it is all some kind of Ponzi scheme, is equally delusional. A currency, or anything for that matter, has value if enough people believe it does, and that value is enhanced by scarcity. In that context, scarcity based on an algorithm is just as valid as scarcity based on any other form of distribution.
What has changed is that now, professional traders are much more involved in BTC/USD. They don’t care whether Bitcoin gains or loses so long as it moves, and their tendency to use technical analysis makes for self-fulfilling prophecies. If there is a clear indication of a move in either direction it will come if enough people see it and act on it, and there is one right now that will be widely recognized.
Look again at the right side of the chart above and you will see a variant of the classic “head and shoulders” chart pattern known as “Batman ears,” a double spike bracketed by two uneven plateaus. That is a well-known, if somewhat esoterically named formation that suggests a big drop is coming soon.
One can make a logical case as to why that would be true. The chart suggests that despite a couple of attempts, BTC has found a solid top and that we are now pausing before the next move. Given the failure of the bulls, it is logical that they will capitulate quickly from here, and the next attempt will be to the downside.
That makes sense, but what will drive the move is simply that if the majority of traders believe something will fall, their selling in anticipation will make it happen.
It is hard to say at this point how far that move will go, but an initial target of around $5,500 makes sense, and when you combine that with the logical stop loss at around $9,000 you get a reward to risk ratio of around 2.5:1. That is enough to make shorting BTC/USD a viable trade and one that should appeal to anybody who looks at it as a currency pair rather than a crusade.