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Mike McAra

Mike McAra

Mike is a quantitative analyst focused on the economic reality, not theoretical models. His investment thinking is grounded on empirical evidence and common sense.

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Bitcoin Trading Alert: Is It Soon Enough to Take Your Profits off the Table?

Bitcoin Trading Alert originally published on Apr. 25, 2014, 11:42 AM


 

In short: taking profits off the table might be a good idea now.

The news's been the same for some time now every time Bitcoin takes a dive - it's the Chinese government, telling exchanges or banks what to do or not to do with Bitcoin. No one seems to be quite sure what's been said or done, the Chinese central bank's officials don't go on record but the slump is attributed to government actions.

So is the "story" this time around. Today, Bitell, Bitcoin news site focused on China, posted information supposedly available before on Caixin (use Google Translate to read the original article's translation), a mainstream media site:

(...) on Mar.24th, PBOC(central bank of China) had a meeting with a few commercial banks and third-party payment institutions to discuss about further restricting bitcoin transactions, hoping to cut off the capital chain of bitcoin exchange.

During the meeting, PBOC representatives openly criticized BOC (Bank of China) and CMB (China Merchants Bank) which are now still offering account opening service for BTCChina. Since OKCoin, Huobi, BTCChina all opened recharging code business, PBOC emphasized that it's an indirect service that bank offered for bitcoin exchanges, which should be banned too. What's more, they mentioned to suspend money withdrawal service as well.

Furthermore, Bitcoin supposedly went down "due to the news."

We've written this before a couple of times already but it's probably never enough to reemphasize: it is extremely hard to pin down the exact influence of a given event on market prices. Of course, it is possible that the news from China had something to do with the dive in Bitcoin. The extent of such influence, however, is highly debatable.

Instead of focusing on the "story," we prefer to see if anything has actually changed for the currency. From where we stand, it seems that the Chinese central bank is hostile to the currency, perhaps because of the fact that Bitcoin provides a relatively easy way to channel funds, which makes it an attractive vehicle for circumventing the capital controls imposed by the Chinese government. So, the Chinese central bank launches attacks on the currency in order to diminish the risk of funds flowing outside China. This doesn't actually have to have much to do with the currency's risk but rather with the policy of the Chinese government.

But all this has been known for a while now. It's not a surprise that the Chinese government or central bank makes a move against Bitcoin - it's done so before. The one thing that's changed is the extent of these actions, which are becoming increasingly restrictive towards the currency. So, looking calmly at the market, not much has changed. But market participants are not necessarily free of emotions. It seems possible that any negative news from China meets with an emotional response from Bitcoin users. This was the case in December and in the second week of April.

What conclusions can we draw from this? In both of the previous cases, the initial strong decline was followed by a rebound. This might be the case now as well.

Let's turn to the charts.

BITSTAMPUSD Bitcoin BitStamp (USD)
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On BitStamp, Bitcoin went 2.1% up yesterday on increased volume. Based on yesterday's developments alone, the situation could have looked as though the short-term outlook had improved. It hadn't meaningfully improved, however, if one took into account the overall situation and the fact that one close above $500 was only a first sign of strength in days.

Today, we've seen all of yesterday's gains erased and Bitcoin going 8.2% lower and a more than threefold increase in trading volume (this is written around 10:15 a.m. EDT). Recently, in our Bitcoin Trading Alerts we've repeatedly expressed our bet on Bitcoin going down following a period of stagnation. For instance, yesterday in our Bitcoin Trading Alert we wrote the following:

On more confirmation of the bearish short-term outlook might come from the fact that the recent rally lasted 6 days and the current period of stagnation is already 7-days-long. What we're seeing now doesn't look like a pause in a rally but rather as a return to the prevailing state of the market, one where prices are falling. Our bet is that Bitcoin will reach $200-250. After that point, appreciation could resume.

(...)

We expect to see a stronger move to the downside in the near future.

This stronger move down materialized today. Based on the past situations we've mentioned before (December and April), we now expect part of the move down to be reversed. Because of that we think that taking profits off the table and closing the already-profitable speculative position might be a good idea at this time.

We had suggested the possibility of opening such a position in our Bitcoin commentary on Apr. 18 when Bitcoin was around $480 on BitStamp. At the moment of writing these words, Bitcoin is around $461, 4.0% lower. The trade was on the table for 8 days.

BTCEUSD Bitcoin BTC-e (USD)
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Yesterday, Bitcoin went 2.7% up on BTC-e on increased volume. The short-term outlook might have seemed bullish but only if one treated that day in isolation. When considering the action in the context of the overall trend, the short-term outlook remained unchanged and bearish.

If you recall, in our Bitcoin Trading Alert posted on Monday we wrote the following:

If there is a difference, we've seen it today, not in the price, since Bitcoin is also down on BTC-e, but in volume as the trading has been visibly weaker today than it was yesterday. Our bet here would be that the stagnation on BTC-e will be followed by depreciation stronger (not much but still) than on BitStamp.

This is precisely what we saw today. Bitcoin went 9.3% down on BTC-e as compared with 8.2% down on BitStamp. The volume exploded and the bearish short-term outlook has yielded concrete results.

On the other hand, right now it seems possible that we'll see a counter move which would erase some of the current gains. As this is our bet now, we're of the opinion that closing short speculative positions and cashing in now might be a good idea.

We had first suggested this short position in our Bitcoin commentary on Apr. 18 when Bitcoin was around $467 on BTC-e. Since then the currency has gone down to around $447 at the moment of writing these words. This was a 4.3% move in 8 days.

Summing up, in our opinion profits from the short position should be taken off the table no speculative positions should be held in the Bitcoin market at the moment.

Trading position (short-term, our opinion): no position. If we see a move up now, we might re-enter the short bet at higher price levels.

Regards,

 

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