In a hurry? We don’t suggest closing long positions at the moment.
Joe Weisenthal posted an interesting piece on Dec. 30, in which he takes up the gauntlet thrown by Paul Krugman (detail in our previous bitcoin alert). Weisenthal argues that Bitcoin is a hybrid of three things with which we're all pretty familiar: a currency, an equity, and a social network.
The main point seems to be that there are powerful network effects in play and these effects make bitcoin attractive to different kinds of individuals. This idea offers an intriguing perspective where you could compare bitcoin to Facebook, Myspace or Napster. The mere fact that quite a lot people are using bitcoin makes it more valuable than different digital currencies with similar characteristics. There is also the risk that the users will leave which might severely depress the value of bitcoin (this actually happened with Myspace).
But the most important point for investors is the comparison of bitcoin to startups – one may think of bitcoin just as they would of a promising company in the early stage of its life. The whole venture might fail leaving you with nothing but if it hits off as a currency or as a payment protocol or anything else, the payoff may be extreme. Keeping that in mind is crucial – the way to go is to invest in bitcoin only the money you can afford to lose.
The future of bitcoin is anything but certain, but the currency may become a game changer if it hasn’t already.
Now, let’s get our feet back on the ground and see what’s recently happened in the bitcoin market.
Compared with the close on New Year’s, bitcoin went up 1.2% yesterday and reached $816.00 on Mt. Gox. The move took place on moderate volume which fits in with the general trend up we’ve seen since Dec. 22.
The action today is still to the upside but so far it’s been weaker than in recent days. Right now (past 7:30 a.m. EST), bitcoin is trading at $823.00 but the volume has only amounted to btc 2,383.34. It seems as though the pull up has weakened.
You should remain particularly alert now as a small move up on weak volume might be the first sign of deterioration. Is this enough reason to be concerned enough to close longs? Not yet, as we haven’t seen significant action to the downside, but caution is key here.
Bitcoin moved farther away from the $700 level (dashed red line). Consequently, there is more space now between the current exchange rate and this first-warning trigger. If the currency breaks below $700, we’ll view that as a first significant sign of worsening. A drop below $540 (solid red line) would hit our stop-loss level ($550) and most likely change the short-term outlook to bearish.
On the other hand, if there proves to be more strength in the market and the price of bitcoin drifts away up, it might reach the $1,000-1,100 range (solid green line).
The situation seems to have normalized recently, the volatility has fallen and the volume remains moderate to weak but this might also hint at the possibility that some fresh cash is waiting to enter the market at a more favorable price or to join a strong trend since no such trend is obvious right now.
It seems that one should closely monitor volume levels. A random move of considerable size in any direction now could pull the sidelined capital behind it and start a short-term trend. Technical analysts like to picturesquely compare such a situation to a coiled spring. Timid market action would be like the process of coiling a spring – apparent peace before a storm when the spring uncoils. The question how long it could take before increased volatility materializes remains.
Summing up, in spite of the relatively slow volume, it still seems that the outlook is more bullish than not at the moment.
Trading position: long, stop-loss at $550. The fact that the volume has been falling prescribes additional caution at this time.
Regards,
Mike McAra
