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Bitcoin Trading Alert: Move Down Still in the Cards

Bitcoin Trading Alert originally published on March 31, 2015, 12:56 PM.


 

In short: speculative short positions, stop-loss at 283, take-profit at $153.

The development of Bitcoin shares traits with the development of the financial system as we know it. The problems which marred some Bitcoin exchanges seem similar to the ones which contributed to the introduction of deposit insurance. In a way, Bitcoin exemplifies both the troubles that the financial system encountered in the past but also the opportunities it offered. We actually saw an interesting piece on the Quartz website drawing parallels between the organization of stock trading and the Bitcoin system:

Watching the bitcoin market develop, you get an appreciation for why other financial systems developed the way they did.

Companies that help you buy bitcoin, hold it, and transact it: you might call them brokerages, or even banks. Deposit insurance? Bitcoin doesn't have it yet, but there's a clamoring for it every time an exchange fails and its customers are left with no recourse for their vanished wealth. And while bitcoin was designed to function without a central bank, the currency's price volatility has some bankers recommending the creation of one.

And now here we are, half a dozen years into bitcoin's existence, talking about the potential value of centralized clearing.

It's not criticism to say that the bitcoin financial system will likely adopt a number of the features of the current one--merely a reminder that those features tend to exist for good reason.

It seems to us that deposit insurance might actually be introduced for Bitcoin exchanges. We would, however, take a slightly different angle. It's not so much the elements of the traditional system that will be imposed on Bitcoin but rather Bitcoin will enter the traditional financial space and might become part of the regulated financial system. In this way, Bitcoin could become a means of payment just like credit cards are a means of payment today.

Whether Bitcoin will be subject to centralized clearing is perhaps more controversial. The main advantage of the currency lies precisely in the fact that it solves a problem of trust without having to impose an intermediary. Introducing an intermediary could defeat some of the advantages, for instance it would impose higher costs. On the other hand, clearing houses could be imposed in ways that wouldn't necessarily interfere with the main structure of the network. The question of how this will be handled remains very much open.

For now, let's focus on the charts.

BITSTAMPUSD Bitcoin BitStamp (USD)
Larger Image

Yesterday, we wrote the following:

Over the weekend, Bitcoin went above $250 on BitStamp but erased all the gains and depreciated more substantially on Sunday on slightly increased volume. The trading wasn't heavy enough to proclaim a new downswing was underway but Bitcoin moved more decisively away from $250. This might herald more declines on the horizon.

Currently, Bitcoin looks very much like it's back in the downtrend, and after a move above $250 it closed below this level once again. Today (...), Bicoin hasn't moved much and all the movement has been below $250. It seems that, based on Sunday's drop and today's lack of action, the currency might close below $250 for the second day in a row. In our opinion, the situation just went from "bearish" to "even more bearish" as far as the short-term outlook is concerned.

The action hasn't been very significant today (this is written after 12:00 p.m. ET). Bitcoin has stayed below $250, and we're yet to see a more significant move down. The short-term outlook remains bearish.

BTCEUSD Bitcoin BTC-e (USD)
Larger Image

On the long-term BTC-e chart, we see that Bitcoin is still below $250 (green line in the chart). Based on that, and the price-volume dynamics we've seen today, our recent comments remain up to date:

At present, it seems that Bitcoin is starting to move back in line with its general trend which has been down for some time now. The currency might depreciate to $200 or even lower, based on the possible declining trend lines and on the January low. Bitcoin could go as far as $150, in our opinion, but for the time being more focus is on the $200 (dashed red line). If Bitcoin moves down as far, we might see a consolidation or even a temporary move up. In the current situation, the move down to $200 might accelerate any day now, particularly if Bitcoin stays below $250 for longer.

The fact that the currency is heading for yet another close below $250 suggests that the situation might be becoming more bearish for the short term. There still seems to be room for declines.

Summing up, in our opinion speculative short positions might be the way to go now.

Trading position (short-term, our opinion): short, stop-loss at 283, take-profit at $153.

Regards,

 

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