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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 in Tight Range

Bitcoin Trading Alert originally published on April 11, 2016, 11:12 AM.


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

Bitcoin might change how the banking landscape looks like, but it most likely won't substitute banks, we read on CNBC:

(...) Brock Pierce, the chairman of the Bitcoin Foundation, said that while the adoption of blockchain will hit parts of a bank, it will ultimately create opportunity.

"There are certain aspects of their business that are going to be negatively impacted, but there are also going to be other business units that are going to be positively impacted and new business units that get created that might not even exist today," Pierce told CNBC in an interview on Monday.


"I think banks are going to take a while to integrate this ... it's going to take them years of testing before they start to commercialize aspects of the technology ... it's more likely to have an impact in other industries in the short term which are less-regulated and where the stakes are lower," Pierce told CNBC.

Pierce also explained that there would be "dozens of different versions of blockchains" deployed for different use cases.

Some of the points made here are actually pretty relevant for Bitcoin, in our opinion. Bitcoin is the first system to provide the opportunity to transact without third-party verification. Numerous other digital currencies have mushroomed since, however, Bitcoin has been able to remain the most popular one. Now, the technology underlying Bitcoin is being applied in the banking sector. The arrival of Bitcoin was first associated with the idea that it could somehow supersede the banking system. Right now, it seems that the development in the Bitcoin space is going in a different direction.

The Blockchain - the technology powering Bitcoin - is being researched and modified by startups, and implemented in specific networks within banks or exchanges. The work focuses on using the ledger system to facilitate various banking operations. It's still very early to really know how this is going to turn out but at the moment it seems that there might be considerable impact in the area of operations, for instance in the processing of securities by the back office.

So, rather than diminishing the role of the banks, Bitcoin is more likely to reshape the banking landscape and change how financial institutions operate. This shift might create a lot of opportunity for companies willing to step in and work with the banks to develop ledger systems.

For now, let's focus on the charts.

BitstampUSD Daily Chart

On BitStamp, Bitcoin has remained flat for the last couple of weeks. In our recent alert, we wrote:

(...) we haven't seen much action in the last couple of weeks. This makes Bitcoin "boring" in the eyes of some investors. But is it?

We don't think so. Actually, we do think that the fact that Bitcoin has become less interesting for the financial press might be an indication that this is precisely the time we should pay particular attention to the currency. Generally, Bitcoin gains publicity only after major moves have transpired, not before they do. This doesn't mean that Bitcoin has to move shortly, no one knows that for sure but the lack of motion is not an indication that Bitcoin won't move in the future. (...)

Bitcoin is at a possible long-term declining resistance line, not really above it. This means that the outlook for the currency hasn't really changed in a substantial way as far as becoming more bullish is concerned. Zooming in on the last couple of days, Bitcoin is slipping below the 50-day moving average. The move is not confirmed and it is not a very strong bearish indication at this time, but it is a bearish indication nonetheless. (...)

Generally, Bitcoin went up in the previous week and it shot up on Easter Sunday. This could've looked like a bullish hint but actually the currency paused the appreciation yesterday and it has erased all of the previous gains today (...). Is this the depreciation we've been waiting for? Unfortunately, this isn't clear at this time. The depreciation seems to be the hint that the trend remains down and the recent swing to the upside is nothing more than a countertrend correction. At the same time, we haven't really seen enough depreciation to consider the next major decline underway. It might be, but this is still not perfectly clear.

Bitcoin is still above $400. Our previous comments are still up to date. This doesn't mean that the situation is boring. Quite the contrary, the currency is at the 50-day moving average and it's been trading around this line for a couple of days now. If we see a more pronounced move away from the line in either direction, the short-term situation might change (the medium- and long-term outlooks might take more to change). Particularly, if we see a move below the line, and a prolonged one, the situation could become even more bearish than it is just now.

BTCE Chart

On the long-term BTC-e chart, Bitcoin is above $400. Our previous remarks are still up to date:

The one thing that we might add today is that for the last couple of weeks Bitcoin has been trading on thin volume, particularly the case in March and now in April, but we haven't really seen an important uptick in volume since January. This might have lulled investors and traders, but one should be on alert. We definitely wouldn't bet on the volatility staying low indefinitely. Quite the contrary, once a move transpires, it might be significant.

Bitcoin is still close to a possible long-term declining resistance line, but there has been no visible breakout. At the same time, we see Bitcoin marginally below the 50-day moving average. These two facts point to the conclusion that we might see a more volatile move if the spot exchange rate drifts from these lines further. This hasn't happened yet. If the exchange rate drifts downward, the situation might become even more bearish.

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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