BITCOIN LONG-TERM FORECASTS

Konstantin Rabin

Since its introduction, Bitcoin enjoyed a mystique feeling surrounding its conception and until recently we didn’t really know who was responsible for its creation. What matters though is the fact that it is here to stay as electronic commerce starts slowly but surely to accept it as a payment method for online shopping and not only.

Trading Bitcoin

Because of its sharp advance against the US dollar to above $1200 levels and the high volatility surrounding its moves (gaps are the norm of the game when it comes to trading bitcoin), trading/owning bitcoin has been assimilated to gambling, so “bitcoin gambling” became viral on social networks.

Another thing to add to this fragile environment surrounding bitcoin is the relatively small supply and demand as we all know that any market functions on the old classical supply and demand rule: when there are more buyers than seller, price moves up, while more sellers result in lower prices.

To have an idea about the size of spikes and dips bitcoin has done in the last two years, just take a look at this daily chart showing values over $1200 in November 2013 only for market to trade now around $240 level.

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This makes trading bitcoin difficult as one needs to have a lot of margin in the trading account to fade such moves as the one seen above.

Speaking of the chart above, the two blue shapes show a potential double bottom around the $91 level and this one is supposed to be a reversal pattern. The problem with it is the fact that the bounces that followed are making a series of lower highs and until that series is broken bears should be warned that a move below the $90 is in cards.

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Bitcoin Fundamental Drivers

From a fundamental point of view, factors that are influencing bitcoin are related to further integration in the electronic commerce and US economic events.

While US economic events are easy to follow as the economic calendar is telling us all the time when important news are released, other factors like lack of regulation fuel the bitcoin gambling camp.

When it comes to central banking, major central banks in the world have the mandate to keep inflation below or close to two percent and therefore they will move on interest rates based on how far or close this mandate is to be fulfilled.

In the United States, the Federal Reserve actually has a dual mandate:

  • To keep inflation below or close to 2%;
  • To create jobs.

Job creation seems to be resolved in the sense that with the unemployment rate at so lower levels and with the participation rate starting to show signs of reversal from the multiyear downtrend, Fed cannot want more.

The problem comes from the inflation part of the mandate as it is lacking and therefore keeping Fed from initiating a tightening cycle. Therefore, knowing when CPI (Consumer Price Index – inflation) is released each and every month is key in correctly interpreting the way the US dollar is going to move, hence is key to the way bitcoin is going to move as well.

What next?

Traders are puzzled now as no one really knows what the new direction will be: above $1300 or back below the $90 level?

In order to answer such questions and avoid the assimilation of bitcoin trading with bitcoin gambling, technical analysis can be useful.

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The chart above shows that actually there are two levels to watch: either a break above the $300 level or below the $91 level again.

In the first case, such a break will invalidate the lower-highs series and open the gates for a test of the end of the previous triangle with the double top mentioned earlier being in place. Unlikely though that this scenario will come to fruition and I’ll explain why.

Trading is a constant fight between bulls and bears and those pink squares are showing bears putting pressure on bulls at each and every attempt to rebound. Therefore, most likely we will see prices tumbling below $90.88, invalidating the double bottom and continuing the downtrend.

When it comes to the downside target, I would be cautious staying short below the, say, $75-$80 level and what I would do in order to look for a possible bottom is to track the DXY (Dollar Index) chart for signs of reversal (like a head and shoulders pattern, a wedge, etc.).

It is only normal to look at the dollar when it comes to bitcoin trading as any other way to trade it should be assimilated to bitcoin gambling.

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