The correction in cryptocurrency prices has been purely technical and a bounce looks likely.
The cryptocurrency market rout this week saw significant falls in the value of Bitcoin and other major coins. Bitcoin (BTC) slipped to a 13-month low last week, falling below $5,000 – its lowest level this year, and very far from the highs of $19,500 seen in December 2017. Overall, Bitcoin ended 14.9% lower last Thursday to $5,357.02. Bitcoin dropped again this morning, towards $4,000, a total fall of 10% in one day, bringing its total decrease to 66% since January. Meanwhile, Ethereum has fallen by another 4% in the past 24 hours to $129.32. The shakeout continued across major cryptocurrencies. Overall, Bitcoin is down 66 per cent since the beginning of the year. The total market cap for cryptocurrencies fell below $200 bn this week, from an estimated high of around $800 bn in January.
While highly speculative cryptocurrencies can be quite volatile, it can be difficult to talk about fundamental drivers for price changes. These falls have raised questions about whether a market correction has now happened, or if further losses will take place, or if investors may abandon crypto-assets. Some detractors have said this is the beginning of the end for cryptocurrencies entirely.
At BCB Group, however, we believe the current move is entirely technical in nature and is likely to be short-lived. The Bitcoin Cash (BCH) “hard fork” provided the catalyst for the market to break downwards at a vulnerable moment.
The market had been testing the upper bounds of a bullish descending wedge, which began wide at the top and contracted as prices moved lower, dating back to February (see Figure 1 below). In general, falling wedges almost always have a bullish bias.
We were expecting prices to break upwards from this, however, the BCH fork happened at a very vulnerable moment – just as the uptrend in June (blue line) hesitantly met the roof of the bullish wedge (purple) on very low volume. This caused BTC to break the blue uptrend, which, in turn, caused a panic/hard selloff.
More crucially however, we have now reached our May 2017 target for the retrace from the December highs ($5000) – and are now slightly below the main logarithmic uptrend channel which has been repeatedly confirmed since 2011 (see weekly chart below), representing approximately 300% year-on-year growth.
The daily relative strength indicator (RSI) is the lowest in history (at 13.7 up at the time of writing, up from a low of 11.8), implying a bounce is likely soon. The general sentiment on social media is heavily bearish and the number of short contracts has been rising sharply – which together are another strongly bullish contrarian signal, as we see it. All of these movements echo the ‘flashcrash’ event in 2014 which ultimately proved short-term.
By this analysis, these factors taken together point to the likelihood of a bounce back into that longterm uptrend channel in the next few days.
This hypothesis would be thrown into question however by a weekly close on heavy volumes below the long-term channel (around $5600) – and confirmed invalid by an unsuccessful attempt to regain that channel over the coming days. At the time of writing the weekly chart does have a bearish tilt with RSI below 20 and MACD having crossed over so this remains something to monitor, and more conservative traders are likely to be awaiting confirmation of a strong bounce back into the channel before entering long.
Ultimately, these hard forks and price corrections have been due to the underlying blockchain technology on which crypto-assets are based, and which are still developing, alongside the financial regulation also still being worked out. As innovation becomes supported by investment in research and development, clearer regulations and institutional money, the situation should improve more sustainably. We believe appetite for crypto-assets will be sustained, and even increase into 2019. Mainstream applications and big market players are yet to emerge. But it is too early to say where the future price level will eventually settle.
BCB Group has no position or opinion on the price of Bitcoin or any other cryptocurrency and this article should not be construed as analysis of or advice regarding the current or future market price of Bitcoin or any other cryptocurrency. No analysis of the price movements of BTC or any other cryptocurrency or any other asset provided by BCB Group should be construed as an invitation or inducement to buy, sell or otherwise to trade BTC or any other cryptocurrency.
Jon is MD of British music production company Poseidon. He began studying technical analysis in 2000 for use in managing his own investments and due to its overlap with behavioural economics – much used in Poseidon’s international marketing work. This has seen the company achieve three iTunes US number one albums in as many years among other notable successes.
A Bitcoin investor since 2013, Jon has been providing Technical Analysis (TA) commentary for a private community of Cryptocurrency investors since mid 2017.