Fresh from my World Cup tipping triumph* I wanted to focus my trading skills and expertise** onto bitcoin.
I am less interested in the technology behind it, as good and as innovative as it is, rather I want to just look at the price action in the market, because since early May it has been drop – plateau – drop – plateau (repeat at least five or six times). In many ways, price action in bitcoin is the ultimate trend follower’s friend, yes there have been occasional bouts of random volatility, but since the futures exchanges got into the product it has been trend-tastic, which is good news for a lot of the CTAs that like to use exchanges.
The interesting and for some, shocking, thing in the bitcoin trend has been that it is down, which brings me to the key question confronting anyone thinking of trading, or investing, in bitcoin – what is the rationale for buying?
The aforementioned price action of drops and plateaus is symbolic of the optimists buying bitcoin, seeing nothing happen, and then giving up on the position. Partly they are encouraged by the obligatory article in the press about “why now is the time to buy bitcoin” (usually penned by someone with an interest in having the market pop higher), and partly by the history of last year. But here’s the thing; surely last year will, in the prolonged history of bitcoin (should it exist in a few years’ time), ultimately be seen as the outlier?
I recall having conversations earlier this year with, shall we say less experienced traders (not, not my Mum), who were asking about buying bitcoin as they were being encouraged to do by certain media contributors (being mischievous I have to point out these bulls were writing at $10-11,000). My response was as stated earlier – what is the rationale for buying? Is there a fundamental reason that bitcoin should go up?
The emotionally charged (and driven) market that existed last year is a distant memory. Bitcoin, thanks to it becoming more mainstream, is now a much more rational market – and that means you get less silly moves and people are actually thinking about market drivers.
So why buy bitcoin? Is it a vital means of payment? Yes it is global (where accepted), but the cost of using it for day-to-day items is still pretty high so on balance I would say no, it has at best a minor function for payments.
Does bitcoin represent a store of value that can be built upon? The minority of ICOs that get off the ground may represent value, but generally speaking owning a bitcoin does not entitle you to a dividend or interest – it just entitles you to own a bitcoin. So again, no, I don’t think there is a function as a store of value.
It is still (potentially) early days for bitcoin and it may well be that in years to come it actually does become a reserve currency, used globally, but that’s not going to happen soon and therefore again, another reason to buy disappears. At some stage there may be value if the global reserve currency scenario plays out, but it could easily be at a much lower price than the $6350 at which it sits at time of writing.
So bitcoin doesn’t really have a strong function as a payment mechanism or a store of value, and global use and acceptance remains some years away. This means there is one reason to buy bitcoin – as a gamble. Basically buyers are taking a punt on more demand emerging for reasons that are unclear to most of us at this moment in time. We know bitcoin has a limited supply, that was a big driver of last year’s surge, but the world is smarter about the still nascent currency than it was then and the dabblers, those who wanted to know how it worked – like me – have had their curiosity quenched and some of the pioneers have started to investigate other cryptocurrencies, which brings me to reasons to sell.
Bitcoin is fundamentally a “long” market, people own bitcoins and while the advent of futures brought with it the opportunity to short, most strategies still revolve around “buy and hold”. Any market with a natural bias is exposed to long/short covering and bitcoin, in the new rational era, is no different. The fact that long time longs are in at a good level means I am not talking about a sharp drop scenario, but as eyes are turned by the latest shiny new toy in crypto-land, selling pressure could be persistent.
Another issue is the low barriers to entry in crypto – look at the number of cryptocurrencies out there, it shows how easy it is to issue a new one, which means competition for crypto-investors’/traders’ money will continue for bitcoin.
Another rationale to sell is rather old-fashioned – the technicals. Long term (suffering if you prefer) readers will know I am no technical analyst, I rather like the old joke about “what does every sunken ship have?” (A: a chart room), but look at a chart of bitcoin over the past three months and you see a definite downtrend.
Using my technical analysis skills*** there is actually a triangle formation currently in evidence, which often means a break out trade coming one way or the other – and to repeat, the broader trend is down.
The big unknown in bitcoin is the news angle. This morning a report stated that BlackRock was setting up a panel to investigate the possibility of trading crypto futures and the possibility of such a major player entering the market should, at face value, be positive (even though of course its first trade may be to sell the futures!). Generally speaking though, the news cycle in bitcoin is negative. It’s either quiet with nothing going on, or something negative is being reported – again, look at the price action from the last three-to-six months.
Looking at the market through a trader’s eye then, I find it very difficult to find a reason to buy bitcoin here – even if it is around half the value at which it entered the year.
There is one very strong indicator that bitcoin could be going up, however, and it’s this column. I am the man who confidently tipped Germany to win the World Cup, only to see them crash out at the group stage for the first time in history. I then, equally confidently (our old trading desk’s mantra was “sometimes right; sometimes wrong – always certain”) predicted a boring 0-0 draw between Denmark and Croatia, and it was 1-1 within four minutes. I followed up with equally bold, and genuine, predictions that “this was Belgium’s year”, a “South American team would still reach the final” and “Croatia would upset France in the final”.
In other words, if my bearish sentiments don’t represent the kiss of death for bitcoin bears, nothing does.
**Which obviously don’t exist – see World Cup tipping
*** They don’t exist either