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Situation Still in One Mode

October 21, 2019, 9:08 AM Mike McAra

In short: speculative short positions, target at $3,200, stop-loss at $9,300.

The world of Bitcoin enthusiasts is now saturated with news of Bitcoin supply getting smaller and smaller. This fact is sometimes touted as having profound implications for Bitcoin. However, these implications are sometimes not quite clear. In an article on Decrypt, we read:

The most immediate tangible effect of the Bitcoin supply dropping is that, once supply hits zero, miners will go out of business. That’s unless they can live off transaction fees, which generate a pittance because very few use the network for transactions.

Nevertheless, the 21 million cap fuels two powerful narratives: the first is that Bitcoin is “hard money,” a deflationary alternative to fecklessly printed national currencies. Coupled with the halving feature, this produces a high “stock to flow” ratio, the currency in circulation (stock) divided by number of new coins generated (flow). A high ratio, believers say, marks a “hard” currency whose price will tend up, not down.

The second narrative is more simplistic: the scarcer Bitcoin is, the more people will want to buy it. Think old National Lampoon issues, Beanie Babies, dot com domains, Rembrandts. Scarcer assets command higher prices. When only a few million bitcoins remain on the shelves, believers say, it will trigger a frenzied, shop-till-you-drop buying spree on Wall St.

Both of these arguments are interesting and have some merit to them. But they rely on the assumption that Bitcoin will be in demand in the future. If the currency remains in vogue, the hard currency angle could boost the price and the scarcity story does not hurt either. But the thing is that the demand for Bitcoin is a demand for a relatively new technology and it might not remain stable. And so the arguments remain shaky and it is best to approach such claims with caution.

Bitcoin Still Above Retracement

On the short-term BitStamp chart, we are seeing that there has been no pronounced movement.

Bitcoin chart BitStamp

Recall our recent comments:

Our previous observations remain unchanged in that Bitcoin has not broken back above the 38.2% retracement. We are seeing a move away from the 50% retracement but this move has not been strong enough to shift the short-term outlook. What’s important here is the fact that looking at the RSI, we see that the situation has gone to the place where Bitcoin is no longer oversold.

The situation is exactly as it was a couple of days ago. Bitcoin is after a weak move to the upside and the breakdown below the 50% Fibonacci retracement level is now invalidated. This is slightly bearish. The RSI out of the oversold area is also supporting this point of view. But the bullish indications are pretty weak as the move is not pronounced and the volatility is also weak.

Bitcoin has gone down, which is a slightly bearish sign, but mostly because of the fact that we have now seen a small move up which was quickly invalidated. The currency is now right at the 50% Fibonacci retracement level. In a way, this is similar to what we saw some time back, only more bearish. We haven’t seen an important breakdown but the situation is more bearish now that it was previously.

Bitcoin is still very close to the 50% Fibonacci retracement level. No change here as Bitcoin has not moved all that much in the last couple of days. The RSI is out of the oversold level and this suggests that the currency is not in a position where there has been very strong selling. This could mean that there is more room for declines.

Still in Bearish Mode

On the long-term the situation is similar.

Bitcoin chart Bitfinex

In our previous comments, we wrote:

Relative to the short-term outlook, the long-term situation is more bearish. The currency is firmly below the 61.8% Fibonacci retracement level, which suggests that the shift to bearish is still very much in place. Our take is one that Bitcoin is still in the process of possibly forming a bottom. This could take an extensive amount of time to be completed. If we do not see a strong rebound here, the situation might remain unchanged and more depreciation could follow.

And we have not seen a strong rebound. This, along with the fact that the breakdown below the 61.8% Fibonacci retracement still holds suggest that in spite of the lack of depreciation, the situation remains bearish. At the same time, it is quite possible that the ETF news is not reflected in the price or is not driving the market just now. At this moment, the overall outlook looks bearish.

Not only have we not seen a strong rebound so far, but actually the recent move up was just reversed. This was more important from the short-term perspective but what about the long-term perspective? The main thing is that the recent action hasn’t really been that visible. If we take a step back and look at the picture, then we see that the main suggestion from the current situation might be that there has been no invalidation of the breakdown below the 61.8% Fibonacci retracement level. The next move to observe is a potential move to around $6,700 and how Bitcoin might behave there.

And the situation persists with Bitcoin still below the 61.8% retracement. This means that the currency is still in bearish mode and the currency might now be open to depreciate even more. Bitcoin could still go up and test the 61.8% retracement but the overall outlook remain bearish in our opinion.

Summing up, in our opinion short speculative positions might be favorable at the moment. The currency is not moving but this means that the currency is still in bearish mode.

Trading position (short-term, our opinion): short positions, target at $3,200, stop-loss at $9,300.

Thank you.


Mike McAra
Bitcoin Trading Strategist
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