Analysis | May 17, 2021

Outlook and forecast: BITCOIN

Bitcoin has seen a surge in retail interest as have other Crypto currnencies in the pandemic. Bitcoin is highly volatile and and we have seen wild swings in it this year. In this article we will look at the background to Bitcoin and trading a sentiment only market with no fundamental asset and our view of the technicals in terms of the key levels of support and resistance.

“Bitcoin is only worth what somebody else will pay for it – it has no fundamental backing to measure it value the market is purely sentiment driven. Craig Wright, Bitcoin’s founder, noted this in an interview in the UK Times nwespaper: “The price goes up because people are paying… but that doesn’t ever last forever. Old Charles Ponzi did that one too.” So the key is obvioulsy to judge sentiment if trading bitcoin which we will look at later but first, its worth looking back in history at previous financial bubbles such as the Tulip Mania…

Bitcoin and the Tulip Mania

The Tulipmania in 17th century Amsterdam and is one of the most famous bubbles in history: “The Dutch bubble also occurred during a global pandemic, a Plague that ravished early-modern Europe… it appears the Netherlands suffered a particularly severe outbreak of the disease between September and November 1636, which was just weeks before the price of tulips went “exponential” . One popular narrative blames excitable Dutch merchants who had nothing better to do than sit around in taverns bidding up the price of exotic flowers – global trade was effectively in “lockdown.” (TS Lombard)

In our view Bitcoin can be traded both long and short by judging sentiment but our view longer term is that Bicoin trading in the pandemic is just the same as in the Tulip Mania but longer term Bitcoin will never gain mainstream acceptance and is unlikely to take out recent highs so we have a bias to trading short.

Why Bitcoin Wont Gain Manstream Acceptance

Bitcoin is highly volatile and will remain so due to being a sentiment only driven market: “To buy a car in September in the US priced at $100,000 we would have had to spend 10 BTC. However, if we had waited until January, with 10 bitcoins we could have bought 4 cars and in mid-March 6 cars. This implies a big risk to spending bitcoins in current transactions” (TS Lombard) Volatility is big as the chart below shows

Its high volatility and the fact there is no fundamental value behind it has meant financial institutions have generally not come into trade Crypto in a big way. “The institutional crypto holdings table is this the hall of fame or hall of shame? Not exactly the blue-bloodiest of institutional support (add a number of hedge fund managers at VCs that like to think more about right tails than left ones)” (The Market Ear) Their right no really heavyweight fund managers are trading bitcoin

The Biggest Users of Bitcoin International Crime

That’s why the only people spending Bitcoin with regularity are involved in crime. Criminals undersatand that Bitcoin’s set-up is a great way to avoid detection from law enforecement so can be used to launder money and sell a wide range of illegal goods. In a recent study it was estimated that over $11 billion worth of cryptocurrency was sent and received by criminal organistations in 2020. Bitcoin is not being embraced by Governmentswith many thinking of banning it which will of course limit Its growth.

Energy Consumption

Energy consumption is huge which was noted recently by Elon Musk: Bitcoin already consumes more electricity in a year than Sweden or Ukraine, according to the University Of Cambridge’s Centre For Alternative Finance and its the biggest consumer of electricity in Iceland.  Not exactly a great way to go in terms of reducing global pollution.

Trading Bitcoin Simple Tips

 What we need to keep in mind is the majority of traders in bitcoin have no interest in the asset itself and most have no idea about trading correctly – they just want to make money. They have read about success strories of traders who were mostly lucky and want to the same.

The volatility in Bitcoin is high and most traders simply dont have good risk management. So on storng rallies when retail traders buy the di,p we would look to sell against them and for retail traders to get hit on stop as the buying dries up. Of course if you are bullish you can buy strength In bitcoin and look for the retail herd to push prices higher. From our perpsective we prefer the risk to reward on shorts.

Bitcoin Technical Analysis

On the chart below, we can see over the last few months we have moved between 6500 and 4500 which is a move in percentage terms of +30%. We would look to sell into resistance levels indicated on bearish price confirmation with stop clear of the next level up or take a close below nearby support for a move down to major support at 3000. In the short term we are a little oversold so would expect a pop higher before blower prices.


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