Bitcoin Forum

As I'm planning to make some large purchases of BTC, I decided to perform an in-depth price analysis as I would before taking any significant position in any market. I come from a background in equities, futures and FOREX and I'm still learning the ins and outs of the Bitcoin exchange market and "Bitconomy", but technical analysis abstracts away most of the underlying fundamentals and allows a trader to focus on the market action / data itself. It amounts to a form of "mass psychology", allowing the analyst to make "forecasts" on asset prices. So what I've done here is spent a little time analyzing the BTC/USD rate and attempting to decipher the ebb and flow of the market from the charts and data. Some people swear by the technicals, and some hate it... But it's made me several small fortunes over the years, and that's enough for me.  8)

Here we go... The overall picture I have of the BTC/USD rate is one with a very bullish long-term future; but due for a short-term correction. The resistance we have seen in the $22.00 neighborhood has proven much stronger than most would've thought, and there it seems that sell orders are stacking up. There are also a lot of traders on OTC trying to liquidate their holdings of several hundred BTC. I think we're simply over-extended at these levels, and need a healthy correction. Lots of speculative $ are stacked up in the BTC and trigger fingers are itchy... Let's look at the chart-work:

First we need to take a look at a 3-month chart, to get an idea of what's been happening over a wider time-frame:

http://img541.imageshack.us/img541/9849/3mo1day.jpg

It seems apparent we've been on a major tear, and the bulls haven't been able to keep running. That is one big divergence in our moving averages, and the MACD is indicating a big drop in momentum. I think it won't be long before we have a cross in the MACD and the rolling correction (if we get one) begins. As of right now we're merely hovering just beneath resistance and just above the EMA-14. Volume has sloped off as well. A little bit of selling pressure can trigger a much bigger move.

Now we'll take a look at what has happened in the last 10 days:

http://img72.imageshack.us/img72/4836/10day1hr.jpg

I have added numbers on this chart to comment on each thing...

1) The most troubling bearish signal I see here is the classic double-top pattern. This is a bearish pattern in which the market reaches a high point, falls back, attempts to reach a new high but fails -- followed by a correction or sell-off.

2) This shorter time-frame gives us a snapshot of MACD as it is approaching the signal line for a cross. Falling below the signal line typically indicates a high potential for downward momentum which will carry on for a while. There is also a growing negative divergence, which is evident by looking at the expanse of the histogram.

3) The #3 points to the tightest resistance line, found around $21.50. We have tested this resistance line twice, and have failed both times. This strongly suggests we're not ready to take out this conceptual barrier just yet -- we've already had a tremendous move.

4) Both of our exponential moving averages (EMAs) are beginning to take a negative attitude and are rapidly converging. We should watch for a cross in the EMA-14 and EMA-60 and interpret it as a signal the correction may be beginning.

5) Volume, volume, volume!!! Where has all the buying volume gone off to? I can tell you: people are feeling iffy about this current price level after this huge move up. This has a very bearish echo, in my opinion, as it suggests new buyers/speculators are not pumping the $ into BTC at this level. People (by which I mean regular users) are complaining about Bitcoins being "expensive" to buy, and that means a slowdown for Bitcoin sellers. A slowdown for sellers means less buy orders on the exchanges, and we all know what that means. They say "price is king", but volume can speak volumes.  :)

I'd like to say a few things to conclude my analysis and break-down... By looking at the EMA-60 on the 3mo chart (the first picture), we can estimate that support will fall around the $16 level. Prices tend to stick to longer-term moving averages in corrections, and that's the one I've got my eye on. I think it's best we take some profits here and now and let this thing cool off. It's not good to stretch too far too fast -- you create big bubbles that can bust a whole economy. So don't view a correction as a bad thing but rather a very good thing. It will give us all the opportunity to make an intelligent and thoughtful re-entry into the BTC market and enjoy the next leg-up. But keep in mind that technical analysis is NOT about "predicting" markets -- none of this is set in stone. Technical analysis is a never-ending quest to become a master of data and chart interpretation and make better risk management and trading decisions.

Personally, I'm planning to buy a large amount of BTC right away. But I'm actually going to transfer it all to my new MtGox and exchange accounts to sell and hold in the form of fiat, giving the correction some room to run. As the price falls I will be buying BTC in increments, in a pyramid-shaped fashion -- this "dollar cost averaging" will allow me to progressively improve my entry point into the market and actually lower my average unit cost. Of course, I'm also accumulating a lot of gold and silver. In dollar terms, gold and silver are a bargain -- and we have another round of QE underway. The good thing about holding gold and silver during a BTC/USD correction is I get a lot more bang for my buck when I sell my bullion and move back to cheaper BTC.  8)

Regards,

--ATC--

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If you enjoyed my market analysis send a tip to:

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I'll start doing this on the regular and in a lot more depth/detail if people enjoy it.  :)

I have thoroughly enjoyed this.  I am watching this topic.  Will consider future donation over what I see in the next few weeks.  :)

But my thanks are free and sincere.  Thank you.

Interesting analysis, thanks for sharing.

I feel like the double-tip pattern might be a result of a self-manifesting "weekend dip", where people noticed that prices dipped around the weekend due to lack of fiat being converted on weekends or such, and now they are moving with that pattern.

If we touch $23 this week, and then Fall to $21 or so this weekend, I think that would prove this.

My theory and your analysis could both be on the right track at the same time though, which would make the correction more graded too...

It is also possible we will be consolidating at these levels...

Welcome to speculation ATC and thanks for sharing.

I think that while you are correct that a double top could be forming, I am not so sure it will succeed. With bitcoin one of the most important factors to consider is the weekend dip (a result of the fact that the exchanges are open 24/7. but the banks are not). Another thing to consider about Bitcoin is that it doesnt tend to dip in the same way that forex or other markets do. If we are in a long term bull trend, the price tends to hover around one target and not move up (rather than retrace down before continuing up).

I think the chances are greater that we continue at this level for some time (similar to what happened at 13) and then continue the trend back up again.

Thanks for sharing ATC

Beware that the fundamentals for bitcoin are unusual.

The block reward halved at the end of Nov-2012 so some of the recent price increase could be a delayed effect of halved supply.
The number of users is exponentially increasing...
https://blockchain.info/charts/my-wallet-n-users
doesn't this look like the price chart?

Buying bitcoin in 2013 could be compared to buying Microsoft shares in 1988. Sensible at any 1988 price...

This big $21 ask wall is certainly going to stall things too...

https://blockchain.info/charts/miners-operating-profit-margin

The miners are back to their comfort zone.

I'm a little confused why you'ld do that.  Doesn't that cause you to incur exchange fees three times?  Buying, selling and then eventual re-buy?  Why not transfer fiat and just pay exchange fees once?

How do you transfer fiat to MtGox and other exchanges without paying more than the exchange fee?

You bring up a valid point. If the market stays flat-calm here at these levels for a week or two I would interpret that as an indication that the rally has legs and these prices will stick. Would indeed be a very bullish sign. Likewise, I think a decent correction is a healthy thing and I will be buying BTC like crazy in any dips.

Regards,

--ATC--

Good analysis. Thank's.

Prices hovering just below the 1-year high of $21.43/BTC. I'm watching this with my undivided attention and interest.  ;D

What happens here at this key technical level will give us a hint as to longer-term future of the BTC/USD rate. I really, really want to see a mild and orderly correction here to allow for a healthy re-balancing of all the money in the Bitconomy. In every market money can only flow in one direction for so long before it's time for some profits to be taken and liquidation and moving-around of funds. Too much money moving in one direction means too much speculative capital stacking up in one place, and holds the market hostage with mass liquidations... too much volatility is, imo, counter-productive for a currency. And we want Bitcoin to grow from new adopters and users, rather than speculative money (though speculation is a valuable slice of the pie).

So watch that $21.43 level. If we fail to take it out, I would prepare for a decent correction and be an enthusiastic buyer near the $17-$16 range (if we get there). There is always the possibility that we catch another big gust in our sails and break out again, but I think continuing to run too far without a rest is a bad thing.

Regards,

--ATC--

[deleted]

+1

No you can't cause you can't see the off exchange volume.

Anyone who values something by its nominal price doesn't have enough funds to move the market anywhere.  It would be like saying Apple stock is expensive but if Apple did a 100:1 split it would be an amazing buy.  If people say BTC is too expensive try selling them some mBTC.  mBTC are going for the low price of ~$0.20 per mBTC.  They just need to switch their client to mBTC mode in the dropdown to get in on this better value coin.

Hundreds of BTC ... now that is some large action.  If they can't move those coins tell them to contact me.  I need some regulars looking to unload 10K-20K a week and I then I might be able to meet demand without outages.  Probably not smart to mix whiskey with posting but if you aren't thinking on the scale of buyers who can pickup ten thousand coins a week, every week nonstop since June, well you are thinking way too small. Hint: it is happening everyday.  Coins moving from people looking for a quick payday to those making strategic acquisitions.


BTW no insult intended your technical chart and other metrics look about as good as anyone else's I just thought the above quotes were interesting given my somewhat unique view of off-exchange activity.  Also none of this should be taken as a sign the market can't go down.  The market goes where it wants to go and I don't trade just arbitrage.

On a similiar note I think people who use BitInstant don't really care about the price as much as online traders.  They are going to a store, picking up a phone, ordering a money gram or whatever and get their bitcoins.  Most of them will not say, "I am going to wait an hour to see if prices drop."  No.  They are at a store and they want their bitcoins.

Supposedly, BitInstant is doing $100K+ a day.

source?

yeah i highly doubt it. thats nearly all of the average volume on gox

yeah, that'd be $36.5 million a year.

I don't have any knowledge of if the number is wrong or right but to put it into context FC4B does >$20K per day and BitInstant is a lot larger and older.  Even if inaccurate $100K is certainly a plausible number.  IIRC there was a Forbes article over a year ago which said something (paraphrasing from memory) like "more than $1M a month".  A year is forever in Bitcoin time.  I mean it is over 87,000 blocks. :)  I think people who assume bitointalk = Bitcoin have no idea how big the system is becoming.  

I looked for the source and...cant say.  What DeathAndTaxes said is in the general vicinity.  BitInstant has over a dozen employees now all over the world.

Nice analysis. I don't technically agree with the double-top theory, but I understand why you made that call.

What I think is significant is this - on the first run-up to all time highs, we only spent 4 days and change above 20. (Including up and down through that area.)

We're already beating that record. The longer we meander around here, I think it gives the market new "legs" for 20.00 as a basis. I'm expecting some minor retrace before we go higher, personally.

There is no double top. A double top has peaks separated by weeks to months.

source (http://stockcharts.com/school/doku.php?id=chart_school:chart_analysis:chart_patterns:double_top_reversal)

Those peaks are on the 1st and 4th of Feb, which is three days. The pattern being formed is pretty clearly a bullish wedge. Not a guarantee that we'll break $21.5/$22, but an indicator that its likely.

@ OP,

Then we break $22 and head to $25...lol

http://bitcoincharts.com/charts/mtgoxUSD#rg30zigHourlyztgSzm1g10zm2g25zv (http://bitcoincharts.com/charts/mtgoxUSD#rg30zigHourlyztgSzm1g10zm2g25zv)

There is absolutely a bullish wedge on the hourly chart.
Also, look how fast the retrace is out of the dips. Like a cat on a hot tin roof.
Bitcoin is already putting a floor in at $21...

Yep, just waking up and seeing this. I think we've already touched $22.00/BTC.

To me, this is both exciting and disappointing. It's exciting because I'm holding a good bit of BTC in my wallet. It's disappointing because I fear that we might be heading into the "danger zone". A bunch of amateur speculators buying something like crazy rarely ends well. Another Bitcoin bubble and crash could be very bad for the BTC's long-term future.

--ATC--

It is also possible you are sad because u waited to load up at $16 waiting for the drop.  Shrug.

That's the other half of it -- didn't you read the OP!? :D

I hear you but I still do not think this is a typical bubble. The spike in 2011 was, especially as the market was immature, with much smaller bitcoin issuance, therefore it was harder for the market to establish a stable consensus valuation.

I am looking at the current fundamentals as well as technicals and see strong fundamentals underpinning the recent enthusiasm driving price.

Check out the 1 year daily price chart, and yes it seems there could well be a very short dip back to $17 from the current level. Note also it is on a doubling trend from $5.50 a year ago, to $11 six months ago, to $22 today...

http://bitcoincharts.com/charts/mtgoxUSD#rg360zigDailyztgSzm1g10zm2g25zv

But then check out the actual bitcoin usage (logarithmic 7-day SMA of USD equivalent volume) over the same year...

https://blockchain.info/charts/estimated-transaction-volume-usd?showDataPoints=false&timespan=&show_header=true&daysAverageString=7&scale=1&address=

This is very similar to the price chart! Even the peak in late Aug 2012 is represented. The price spike in the last month mirrors the major uptick in bitcoin usage across the internet.

A downtrend may only materialize when the usage of bitcoin takes a hit (perhaps because of some as yet unforeseen external factor) which could be months away.

of course we're going to get a pullback at some point but i strongly disagree with the characterization that it could be "very bad for the BTC's long-term future".  all it will be is trading volatility.

No, I'm saying a well-behaved correction would be a good thing for BTC/USD. I said that another huge parabolic move / bubble (and the ensuing breakdown) would be bad for BTC/USD. We don't want another repeat of 2011. It would make a lot of people start to worry that Bitcoin is just a speculators toy and seriously undermine the stability (and utility) of the currency. Remember, Bitcoin was designed for gradual, long-term deflation. It wasn't made to be a high-performance trading vehicle for savvy day traders to pwn its users. If that's what it turns into I'll be happy to make money off of it but it will raise a lot of questions about the stability of the Bitconomy.

Regards,

--ATC--

I agree that price stability would be good for merchants and commerce, and would increase more adoption, but as this adoption will increase the price, you see this is not a stable system yet.
Gradual long-term (price) deflation only happens when bitcoin is already fully adopted.  Right now the inflows and outflows are just too big to allow for a stable currency.  Given the tiny spot that bitcoin occupies in the currency space, it will remain quite volatile for some time to come (although volatility should improve somewhat).

Anything with liquidity will attract day traders.  If that dooms BTC then it will doom everything else (including USD which has Forex trade volume about 20x the value of entire global economy).  Even if you did things like made a crypto currency which batch processed transactions daily (ACH Coin) exchanges don't directly use the blockchain so they can (and will) always provide near instant liquidity.  The only thing which will stabilize exchange rates is more (not less) market depth and most of that comes from speculators. 

Very surprised by your analyses, I think we might be in complete agreement. I am very bearish btc right now. I was getting bearish at 19. 

I think some are misunderstanding (to some degree) what I'm saying...

Speculation and day trading are indeed a vital part of any market, including Bitcoin. We need lots of speculative money and lots of day traders. These are good things. Day traders provide tremendous liquidity to markets, and speculative money increases the depth of the market. What I'm saying is that a tremendous, parabolic move in BTC/USD followed by another crash is going to seriously undermine the stability of Bitconomy. We don't want another sprint to $30 or beyond followed by a crash... that'd be bad news. I want to see the natural ebb and flow of the market, and a climbing exchange rate. And I want to see new adopters and new users and a growing Bitcoin economy. :-)

Regards,

--ATC--

Why?  

Still even if you are right and it bad to have crashes, it is all but guaranteed we will see many (probably a dozen or more) giant crashes (30%, 40%, even 50%+) on the way to higher and higher money supply valuation.  So it is all but guaranteed to be .... "bad" (your definition).

I think parabolic moves up and crashes are the natural ebb and flow of tiny markets, though I am not an expert.

Correct. And as the market gets bigger and bitcoin usage matures then the spikes and crashes will diminish in amplitude.
There was a 90+% crash in 2011. The next crash may be "just" 50%, then after that perhaps 30% etc.

Even the yen and euro can easily rise or fall 1% in a day, and these are 10,000 times bigger than bitcoin.

The Bitcoin price is stair-casing up, which is a strong bullish trend. The bears are also getting exhausted trying to pick the top for selling.

http://bitcoincharts.com/charts/mtgoxUSD#rg30zigHourlyztgSzm1g10zm2g25zv

See Jan 25, Feb 2 and Feb 10. Each time the sell-off is weaker and weaker.

The (short-term) end to the stair-case will be a blow-off top, where the price spikes 2 or 3 dollars in a day and retreats. There was a small such top on Jan 25 when it went from $19 to $19.75 very quickly and was kicked back down straightaway. The bears saw it and sold off hard in a bout of profit-taking which had the price back to around $15.80.

From the current price of $24, a top would be signalled by a sudden spike into the high-20s and retreat. In the event of massive profit-taking the price could retrace to $21 as this seems the next strongest support level.

Any thoughts?

I'd agree that it is hugging a trendline rather well. I'm wary however - just like you are, because we both know that any selloff should be rather panic-fueled once it gets underway. The only comfort is that the recent selloffs haven't gone as far as they would've in 2011.

It has been a lot of fun to chart it, in any case.