Since June 26 2019, the market’s bitcoin valuation (relative to the U.S. dollar) has fallen by as much as 35%. In the process, asset prices fell through an important psychological level at $10,000 per crypto coin.
But since cryptocurrencies don’t trade on the same fundamentals that are present in stock markets or fiat currencies, analysts’ opinions on the reasons behind these movements in bitcoin have varied widely.
Some crypto analysts have suggested recent declines in the bitcoin valuation have been propelled by lawsuits directed at the industry itself. One of the larger examples of this growing trend was a Department of Justice decision to sue bitcoin exchange BTC-e for $100 million. Other notable examples include recently unsealed charges the DoJ has levied against purported cryptocurrency escrow company Volantis, which involved claims of wrongdoing valued at $7 million.
Of course, potential outcomes stemming from these types of events can be highly unpredictable in nature and the added uncertainty they create can weigh heavily on investor sentiment. This is even truer when we are dealing with negative stories that are tied to the credibility of an asset class that is still in its relative infancy.
From a strategic standpoint, this “fundamental unpredictability” is one of the reasons I tend to view trading methods based on technical analysis as objectively predictive indicators of what is likely to come next in the world of cryptocurrency. However, there are still many problems that exist in terms of the ways a majority of the world’s crypto traders utilize these tools and techniques.
As a classical chart technician, one of the main problems I have with the technical analysis of cryptocurrency is the fact that we aren’t dealing with a price history that’s truly valid. In other words, the market hasn’t yet had an opportunity to test a variety of price levels in a consistent and repeated fashion. This removes some of our ability to forecast future price movements with any significant level of accuracy.
Many of the charting platforms I watch include social networking features that show technical analysis strategies other traders share publicly —and there is some very interesting work that is being conducted via these outlets. Ultimately, it’s clear that cryptocurrencies have opened up the financial markets to many new participants that might not otherwise have an interest in traditional asset classes.
However, I have a difficult time suspending disbelief when crypto traders suggest certain support/resistance levels are likely to hold/break with any real level of certainty.
Charting analysis only works when it is possible to model probabilities for future price events based on collective market behaviors that have occurred in the past. This may sound overly academic and out of the grasp of most traditional investors. But, in reality, it isn’t that complicated at all. In fact, these are market forces we encounter on a daily basis.
Here’s a practical example of this seemingly complex topic at work: If people tend to buy bananas in the supermarket whenever they go on sale at $0.60 a pound, we can reasonably expect that this is likely to happen again in the future.
This is not a guarantee buyers will enter the banana market and buy at these levels. Rather, it is an increased probability buyers will enter when this discount is made available.
Generally, it’s not much of a surprise to see discounted store items fly off the shelves. The same rationale works in reverse: Any time market prices reach historically elevated levels, sellers are expected to capitalize on the opportunity and unload their assets at a profit. If we apply this logic to the recent trends in bitcoin markets, some clearly defined levels can be outlined.
Specifically, the high from June 26th (at $13,868.44) marks a level of resistance that may encourage selling activity from those trading in the bitcoin market. Conversely, the price low from July 17th (at $9,071.00) may work as a support level that encourages buying activity in bitcoin assets. To illustrate these price zones, I have included support/resistance levels on a BTC/USD price chart which readers can analyze for further detail.
As always, remember to stay safe and use conservative position sizes when trading these new digital assets. Bitcoin and the other major cryptos have (literally) produced some of the most volatile price moves that we have seen in the history of the financial markets.
Success through accurate price forecasts can be highly profitable. However, irrational exuberance can quickly lead to losses that are just as substantial. Ultimately, it is best for investors to take an objective approach to any real-money position and to base decisions on market probabilities rather than the irrational perception of certainty.
Richard Cox is a personal investor with more than two decades of experience in the financial markets. He is a syndicated writer, with works appearing on CNBC, NASDAQ, Economy Watch, Motley Fool, and Wired Magazine.
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