By Pinchas Cohen
On Saturday, Bitcoin fell below $5,000 as crypto markets suffered a $13 billion sell-off. In one day, Bitcoin lost 7.5 percent from close-to-close and more than 11 percent from the high to the low. No fundamental reason was known. The sell-off was spurred by profit-taking, as part of a correction, after the price advanced 21 percent higher than its uptrend line, the farthest distance from the line that marks the angle of ascent since August 17, when it was 25 percent higher than the uptrend line. It was followed by a near-20 percent decline over the next 6 days.
On Monday, The People’s Bank of China published a statement on its website that it completed an investigation into ICOs and found them illegal. China has forbidden the transaction of digital tokens as currency on the market and banks are prohibited from providing ICO services in the future. Starting immediately, new offerings will incur strict punishments, and past offerings must be returned. Token financing and trading platforms are prohibited from converting coins into fiat currencies.
Bitcoin dropped about 8.5 percent yesterday, extending its decline another 5.2 percent today, as of 2:00 EDT.
All told, Bitcoin fell 20 percent from its September 2, all-time-high. It's the sort of benchmark decline that turns a bull market into a bear market.
Is Bitcoin Now in a Bear Market?
First a reminder: a bear market refers to the market's 'impetus' trending downward, in which case any advances are considered nothing more than corrections, generally spurred by a combination of short-covering (profit-taking in a falling market) and investors deciding the market has become way oversold and as a result buy the asset in question back up. That customary 20% market reversal metric would seem to support the results following the PBOC's fundamental news.
From a basic trendline analysis, the price has crossed fully below the trendline—demonstrating a decisive breakout in which the bears encountered no bullish resistance—for the first time since the uptrend line’s inception on July 16.
First, this 20 percent decline, which is an accepted but arbitrary gauge, is only to be considered at the daily close. A lot can happen to the price of an asset, especially one as volatile as Bitcoin which has been known to make double-digit moves during a single day’s trading.
Second, the fact that the price of this digital asset is known to make such moves proves that the classic, 20 percent gauge is inapplicable here. We've made this point about Bitcoin in the past, particularly in the context of filters. In June we suggested multiplying the classic 1 to 3 percent breakout filters by 10, to better reflect the price moves of this particular asset. Of course, the price of an asset can’t lose 200 percent, which would mean twice its value, but surely the same 20 percent gauge that applies to stocks and commodities, which normally move in single digit percentages, is a regular, even hourly occurrence for Bitcoin traders.
Third, in the same vein as the first point, crossing below the uptrend line – even decisively – is recorded upon a close, and again, a lot could happen until that time, namely a re-crossing above the uptrend line, or at least a bullish hammer beneath it, which would suggest a potential re-crossing in upcoming sessions.
Finally, while trendlines are significant since technical analysts watch them and respond accordingly, what determines the trend is not the line drawn between the lows but the direction of its peaks and troughs. Once price forms a peak or a trough, it means that supply has overcome demand or vice versa.
Uptrend Remains Intact
Bitcoin's peak-and-trough trend analysis, more than in just general trendline analysis, indicates the uptrend is still intact. Only if and when the August 22, 3600.00 trough is violated will the integrity of the uptrend come into question. To classic technical analysts, even that wouldn’t constitute an end to the uptrend, as there would only be a single falling peak-and-trough, when a minimum of two are required to be considered a trend, with all its psychological implications.
At any rate, while the previous trough is still intact, there is nothing signaling a trend reversal on any level. At most, conservative traders would put things on hold on the break of the uptrend line until the trend reasserts itself.
Unless you are a long-term investor, you can still trade in the short- to mid-term if you are willing to accept risk and establish parameters for risk-and-reward which provide you with the statistical upper hand.
Bitcoin’s Silver-Lining
Fundamentally, the PBOC’s statement, which didn’t mention any coins by name, may very well prove a fundamental boon to Bitcoin, as it eliminates competition and the rapid proliferation of low quality and likely fraudulent coin sales. Stopping those shady activities would give Bitcoin a stamp of approval as the digital currency that is accepted as honest and sound.
Trading Strategies
Conservative traders would wait on a long for a close above the uptrend line since July 16, when the uptrend reaffirmed its direction.
Moderate traders can go long if today’s trading forms a bullish candle with a close. That would suggest that short-traders are in losing positions and would cover their shorts, which means buying the asset, thereby forming the demand themselves. That often creates a snowball effect, which leads to the next rally.
Depending on the trader’s entry-point and money management, the trader can enter immediately on the next open or wait for a correction toward the bottom of the hammer, where new demand is expected to come in via short-coverings and trader perceptions that lower price levels attract new buyers, as has happened previously, which leads these new buyers to create additional demand.
Aggressive traders may go long now, with a stop-loss beneath the 3900.1 hammer low, relying on the 20 percent dip while maintaining the peak-and-trough procession intact as an attractive buying opportunity.
Very aggressive traders may short on the potential correction, with a close stop-loss above, before turning around and going long, closer to the hammer’s support.
Amateur traders will jump in with no plan. If they’re lucky, they'll lose the position. If they’re unlucky, they will win the position and receive encouragement for destructive behavior, which will undoubtedly incur even greater future losses.