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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: Top in Bitcoin Might Be behind Us

Bitcoin Trading Alert originally published on November 9, 2015, 11:15 AM.


In short: short speculative positions, target at $153, stop-loss at $515.

Nobel Prize winner Eugene Fama has recently expressed his views on Bitcoin in an interview with the Bitcoin Uncensored Podcast:

BU [Bitcoin Uncensored]: If you're carrying that much cash, you probably would want the anonymity features of bitcoin. On another note, why do we have 2% processing charges on credit cards you would say? If in fact the cost of moving money is zero.

EF [Eugene Fama]: Well, on credit cards transactions, that's different than a transaction with a bank. The credit card company is taking a risk that you won't pay. A bank is not taking that risk because when I send in a check or wire transfer to a bank, they know whether I can cover that transaction. The credit card company doesn't know if you can cover that transaction, so that 2% you pay or whatever it is 1.5% that's basically a bad debt charge, to cover the amount that they lose to people who can't eventually pay their account. That possibility doesn't exist with bitcoin. Because you either have it or you don't, right? It's like a deposit in a bank, my bank knows exactly how much what I can write and what I can cover. It can refuse checks that are too big.

BU: Yes. Why don't we do wire transfers online at free cost? Why do we use the debit transfers at 2%?

EF: You know, that's just competition. If Bitcoin catches on, those charges are going to disappear.

The cited part of the conversation highlights the point that credit card transactions generally have the same aim as some Bitcoin transactions, i.e. to move money from one place to another, the process might be different and the resulting costs might be different. Since the Bitcoin protocol is set up unlike traditional payment channels like those used by MasterCard and Visa, the cost structure is somewhat different. What's not mentioned in the interview is that even if Bitcoin can operate on a large scale without some of the traditional credit card fees (like the mentioned "bad debt charge"), other fees are likely to enter Bitcoin transactions. Once Bitcoin becomes more regulated, anti-money laundering will have to be implemented, among other things, which will likely incur costs transferred to clients. The main question remains whether Bitcoin or other Bitcoin-based systems will be able to keep the fees low enough to be competitive.

For now, let's focus on the charts.

Bitcoin Daily Chart

On BitStamp, we see that Bitcoin is back below $400 and the price itself might be giving one impression - that Bitcoin has already topped. Is this the case? We give you our opinion.

First of all, recall our comments from Thursday, a day of hectic action:

(...) the action has been even wilder since our last alert was published. Yesterday, Bitcoin started at $400, hit $500 (!!!) before swiftly returning to $400. The volume was over BTC100,000. Speak about crazy, we've just seen it.

Now, take a look at the daily price for yesterday. It looks like a volatile turnaround. Today, we've seen action similar to yesterday but on a lower scale, both in terms of volume and the price. Also, the scope of the move is not only smaller but it has so far taken place "below" yesterday's action in that today's high is lower than yesterday's high and today's low is lower than the corresponding low. Bitcoin might close below yesterday's close. All of this looks like a topping formation.

What we wrote on Thursday in the eye of the storm has turned out to be largely correct, so far. Bitcoin is back below $400 (green line in the chart) but it's still overbought if one looks at the RSI. What's next for Bitcoin? Our take is that Bitcoin might move to $350, the first psychological barrier along the way. $350 is pretty close to $320 the approximate level of the July top. This means that there are possible stops on the way down. Bitcoin might pause now or anywhere in the $320-350 range, but this wouldn't stop the decline, not in our opinion.

We've just seen the most violent move in Bitcoin since at least January 2015 and from a weekly perspective, the cryptocurrency is the most overbought since the 2013 top. This suggests that the move down following the recent top might be pretty sharp. A move back to the declining long-term trend would imply a target level of $230 or so. Also mind that all the tops since the 2013 top have been followed by depreciation, in most cases not immediately but rather by a prolonged period of weakness resulting, eventually, in oversold levels. The current situation looks like a perfect entry point for short positions - we already have hypothetical shorts and they're already profitable, so there's no change here as they might become even more profitable in the weeks to come.

Bitcoin Daily Chart 2

On the long-term BTC-e chart, it looks like the top is in. Bitcoin is still very much on the overbought side and short positions look potentially profitable. Last Thursday, we wrote:

(...) Yesterday's action was almost as wild a swing as you can only imagine. Today's movement has also been volatile and Bitcoin looks like it's heading lower. If this isn't enough, there's more.

Financial media are starting to pick up the "Bitcoin rally" story. Bitcoin is back on the homepage of Yahoo! Finance, we've seen stories on Fortune, CNBC, Business Insider, the Financial Times, Wall Street Journal and so on. Bitcoin is making its way into the mainstream financial media. This is precisely the sign that a top might actually be in. Combine that with the unfavorable technical situation and we have a definitely bearish picture. Add to that that investor sentiment might now be driven, to an extent, by news about a potential Ponzi scheme attracting capital in China and this becomes a combustible mixture.

The bearish picture is still very much the case. If anything, the moves down over the weekend are a confirmation of the bearish outlook as far as we're concerned. The outlook hasn't changed. In fact, it is even more bearish now than it was on Thursday.

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

Trading position (short-term, our opinion): short speculative positions, target at $153, stop-loss at $515.



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