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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: Bitcoin Slipping into Bearish Territory

Bitcoin Trading Alert originally published on December 5, 2014, 10:05 AM.


In short: no speculative positions.

Mastercard's president for South East Asia appeared in a video in which he sternly downplays the importance of crypto currencies, we read on CoinDesk:

In a new video, Matthew Driver, MasterCard's president for South East Asia, issued a strong rebuke of digital currencies like bitcoin, suggesting that cryptocurrencies carry too many risks to be successful.

Noting that MasterCard is "not completely comfortable with the idea of cryptocurrencies", Driver used the video as a platform to blast the technology as "against the whole principle" on which the credit card giant has established its business.


Driver argued that cryptocurrencies "serve a purpose that's not necessarily completely clear", and specifically took aim at bitcoin mining - the process by which a distributed network of computers process transactions - stating:

"Trust is a critical component of any payment system. So, if you think about the idea that, all of a sudden you have cryptocurrencies being manufactured, if you like, on an anonymous computer in an anonymous location, it's completely legitimate to have some legitimate concerns about how it's working."

This might be slightly surprising. Not the fact that Driver goes on listing main his concerns about Bitcoin, after all he probably won't complement the possible competitor for his company. The surprising bit is that the executive came up with a video entirely on Bitcoin. So it seems that he felt that the rise of cryptocurrencies is something that needs to be addressed.

Make no mistake about this one. Bitcoin is not yet any kind of serious competitor for credit card companies. But for the first time in years a system has emerged which might give Mastercard and Visa a real scare. Still in its infancy, as Bitcoin matures and particularly as investments in the security department are made, it seems entirely possible that the network will gain increasing numbers of users. It has been used more and more for some time now, and developments as far as trust in the Bitcoin network and ease of transactions are concerned might just as well turn it away from the "geek sphere" and more into the focus of mainstream users.

Mastercard and Visa are still far too entrenched to seriously fear cryptocurrencies but if these gain more traction, the credit card giants will have to evolve in one way or another.

For now, let's focus on the charts.

BitCoin Chart 1

Yesterday, we finally saw some action on BitStamp. Not very surprisingly, it was to the downside. The volume was actually relatively high compared with what we had seen in the preceding days. What happened was actually very much in line with our comments from two days back. On Wednesday, we wrote:

At the moment, we think that Bitcoin might be in for a move lower, particularly since the recent weak moves up took place on relatively small volume. On the other hand, we're not far from $400 and a break above this level could mean a new higher high being formed. Taking these two things into consideration, we prefer to wait for a confirmation of a new short-term trend being formed.

As it happened, Bitcoin went down yesterday, but it also failed to break the $350 level (dashed red line in the chart). Even more to the point, it rebounded from a daily bottom at $360 to around $370. So, uninspiring as it may sound, the approach to wait on the sidelines and not get whipsawed worked relatively well. On the other hand, we think this kind of tepid movement might not last very much longer. More on that later.

Today, we've seen very moderate appreciation (this is written after 8:30 a.m. ET). Characteristically, the volume has been visibly weaker than yesterday, at least so far. Combine that with what we saw yesterday, that is a day of relatively strong action ending in red and you get a strong move down followed by a weak move up, a possibly bearish configuration. None of this is for sure, though. Nothing in the market is.

BitCoin Chart 2

On the long-term BTC-e chart, we see that Bitcoin is now precisely at one of the possible trend lines. The currency went down yesterday but the volume was not exactly a lot higher than on the day before. The bearish implications were weaker here than on BitStamp.

Today, the move has been moderately up. The volume might end up being lower than yesterday but this is far from sure. One way or another, the action on BTC-e doesn't necessarily look very volatile.

On the other hand, a possible slip below one of the trend lines might suggest that the currency is once again tipping into bearish territory. If this is actually the case, we wouldn't be surprised to see a move to $300. The next bigger move will likely be important since it might establish new local extremes and either support the view that there was an important change in the medium-term trend in October or disprove this claim altogether.

We still think there might be more whipsawing ahead of us but our take is that a more significant move is not very far away and possibly to the downside. For the time being, we prefer to wait on the sidelines since there hasn't been enough confirmation, in our opinion, that a move down is underway.

Summing up, we don't support any short-term positions at the moment.

Trading position (short-term, our opinion): no positions.



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