Bitcoin As An Investment

For a long time I wrote Bitcoin off as nothing more than a purely speculative asset with no real tangible value.

In some respects that still holds true, but with more and more fund managers considering adding it to their portfolio as a way to become more diversified, and as it becomes more accepted as a store of value, I have become increasingly interested in this particular cryptocurrency.

Indeed I am planning to invest 1% of my eToro portfolio into this asset at some point in the future for these very reasons, and am starting to see it as a viable long-term investment for both myself and my copiers.

Downward Price Breakout

The price of Bitcoin has been slowing trending upwards for several months now, and with it trading between $9000 and $10,000, I haven’t been at all tempted to buy in at this kind of price level.

However if you look at the daily price action of Bitcoin just recently, you will see that it has broken below the lower trendline over the weekend and today, indicating that the upward trend may now be over, and we may be seeing the start of a new downward trend.

Therefore I might start becoming more interested in buying Bitcoin if this downward breakout gathers some momentum, and we start to see a serious price move.

At the moment it is too early to tell if this breakout is going to have any real momentum behind it. Ideally we want to see an initial breakout, a pull-back back to the trendline and then a continuation move downwards for confirmation.

If this happens, then we can use fibonacci retracement levels to give us possible price targets, and in this case a 50% retracement of the upward price trend gives us a price of $6989 and a larger 61.8% retracement gives us a target price of $6262.

Either of these two price targets would give me a much better entry point for my 1% investment and would make me a lot more confident about my investment.

Final Thoughts

You may be thinking; is it worth shorting Bitcoin at this point? Well if this was any other instrument and if it had the same chart pattern, then yes it may well be worth opening a short position, but the spreads and fees on Bitcoin are simply too high for my liking.

Furthermore, with Bitcoin there are no fundamental reasons why the price should be higher or lower than it’s current value because nobody knows what it’s true value actually is. It is driven purely by volume of buys and sells, ie sentiment.

I see Bitcoin as a store of value and another means of diversification, and for that reason I am more interested in adding it to my long-term portfolio, but I am not really tempted to trade it up and down at the current time.

That’s why I highlighted this latest downward price breakout. If it starts to head strongly lower and takes out one of the key fibonacci levels, it could then become a buy because at that point it would be highly likely to bounce back, and would also be a great entry point for a long-term investment.

Bitcoin Trading

Bitcoin has always been a popular instrument for long-term buy and hold investors because many people see the long-term value of this particular cryptocurrency, and believe that it will be trading a lot higher in the years to come.

However it has also become a very popular market for short and medium-term traders to trade because many people have found that it follows similar patterns as the more conventional trading instruments (stocks, indices, commodities, etc), and works really well with technical analysis.

So with that in mind, I want to offer my latest analysis of Bitcoin’s recent price action, and highlight why it may be set for a possible breakout in the near future.

Recent Price Action

As you can see from the price chart below, the price has been trading within a descending triangle for much of 2020.

It reached a high of around $10,500 back in February, and posted a low of around $3900 on 13 March 2020, after losing approximately half its value in just two days of relentless selling.

Since hitting that low point, the price has been slowly trending upwards, trading just above $7000, and now seems to be somewhat stuck in a sideways trading range, undecided about which direction to take.

Possible Breakout

This indecisiveness, combined with the descending triangle pattern, suggests to me that we may be about to see a significant breakout once the price breaks decisively out of this triangle.

At the moment it is hard to see the price of Bitcoin breaking strongly upwards because if you look at a few other indicators, you can see that this upward price movement is starting to run out of momentum.

For example, there is divergence on both the MACD and MACD histogram indicators, and both are looking like they might be about to cross downwards, indicating the start of a new downward trend.

If the price were to break below the psychologically important 7000 level, and then close below the lower trendline of the descending triangle, ie below 6900, then it could easily fall back to the 6000 level in a short space of space, and possibly as low as 5000 over time if this breakout gathers momentum.

If, on the other hand, it could move as high as 8000 and break decisively upwards out of this triangle, then it wouldn’t be at all surprising to see it reach 9000 or 10,000 once again, but in this economic climate, this seems unlikely in my opinion.

Final Thoughts

It’s important to point out that these are just my own thoughts and opinions, and is not intended to be financial advice. It’s perfectly possible that there could be a false breakout and the price remains range-bound for the foreseeable future.

However it is still interesting to see how these descending triangles unwind because they will often end with a significant price move upwards or downwards, and with so much sideways price action in recent weeks, that may well happen here with Bitcoin.

You can be sure that many other traders and investors are waiting for some kind of breakout, so as is so often the case, it may become a self-fulfilling prophecy once traders jump on board and trade the resulting breakout as soon as it occurs. Stay tuned.

Descending Triangle Breakout

Last week I was discussing the descending triangle that had formed on the price chart of Bitcoin, and highlighted how it was trading in an ever decreasing trading range prior to a possible breakout.

Here is the chart from this previous blog post:

Well as expected, the price couldn’t stay in this trading range forever, and it eventually closed below this long-established trading range earlier this week, as you can see below:

8000 Level Breached

The closing price of the breakout candle was $8693, which is where many people will have opened a short position, and it was no real surprise that the price continued to fall in the following days.

That’s because many traders will have been watching this descending triangle for many months, and will have been waiting to trade any breakout that subsequently occurred.

The price of Bitcoin actually fell below the $8000 level to around $7739 before bouncing back to its current price of around $8050.

So the breakout could have yielded nearly $1000 x the initial stake per point for anyone brave enough to trade this breakout, and even exiting at $8000, which would have been an obvious exit point for many traders, would have generated a profit of $693 x stake per point (minus the spreads).

Disclaimer – Bitcoin and other cryptocurrencies are highly speculative instruments, and it is possible to lose all of your capital.

Of course this breakout is still very much in its infancy, so there is still every chance that the price could drop even lower than its recent low of $7739, generating even more profits for those traders who decided to trade this breakout.

Sentiment

It is often interesting to look at market sentiment for any given market to see how bullish or how bearish traders are in general, and looking at the Bitcoin market on IG.com, 83% of clients with open positions are expecting the price to rise, and 17% are expecting the price to fall.

On eToro 98% of customers are buying Bitcoin at the time of writing, so these two stats would suggest that people are still very bullish on the long-term prospects of Bitcoin despite this downward breakout.

Final Thoughts

As I mentioned before, I don’t actually trade cryptocurrencies myself because of the risks attached and the relatively large spreads, but it is clear that these markets still conform very well to technical analysis because this was a textbook descending triangle breakout that has already yielded an excellent profit and may still fall even further.

With regards to future price predictions, I said in my last post that $8000 was within reach if there was a downward breakout and this has already been taken out. So I’m not really sure how much further it can fall in the near term.

It may well find a base at this new level and start to bounce back, or it could easily drop below $7000 if we have a few days where it closes below the psychological $8000 level. Either way, it should be interesting to watch.