Last updated on April 14th, 2020
The recent price collapse in bitcoin (BTC) has caused many traders and investors to question the digital currency’s long-term sustainability.
- Will bitcoin recover from its brutal decline?
- What is the future direction of the digital currency universe?
In order to answer these questions, let’s examine bitcoin from a technical analysis perspective. This will provide us with a broader analysis of the market using past price movement and technical indicators giving us a framework moving forward.
One thing we must ask is if the launch of Bitcoin futures on the CME in December 2017 has helped or hurt Bitcoin and its prospects?
In terms of global acceptance and liquidity, it has definitely helped bitcoin. More importantly, BTC futures has helped to reduce the daily volatility of the digital currency. This is extremely important from a long-term perspective in terms of bitcoin’s use as a legitimate global currency.
BTC futures will continue to add stability and transparency to the entire digital currency universe. This does bode well for the digital currency and its future.
Bitcoin Update Based on Technical Analysis
In an attempt to determine the short-term trend of bitcoin, a good starting point is to examine some of the more popular technical indicators that are available to any trader.
These indicators are a mixture of:
- momentum studies
- trend following applications
- overbought/oversold oscillators.
This should provide us with a clear picture of bitcoin’s short-term direction and you can use any trading strategy that you have tested in relation to these readings.
According to the technical indicators, the short-term trend is bullish. Five of the indicators are bullish and three are bearish.
Arguably, the momentum indicators are the most important because they measure the underlying strength of the trend. All three of the momentum indicators are bullish (Average True Range, Keltner Channel and Money Flow Index).
Essentially, it means that the recent rally in BTC is probably sustainable.
Most likely, bitcoin has enough momentum to penetrate the next resistance level. Specifically, where is the next resistance level? Please review the 4-month chart.
The next important short-term resistance level is 12998. In light of the recent price action, it’s quite possible BTC will exceed 12998 within the next 4 to 6 weeks. The chart pattern will remain bullish as long as bitcoin stays above 7204.
A weekly close below 7204, would not be a good sign for the bullish camp. A penetration of this level would reignite the bearish trend. Ultimately, BTC could tumble all the way down to 5112.
For the purpose of this discussion, a long-term trend is defined as any time period greater than one year. A very simple method for determining the long-term trend is to calculate 50% of bitcoin’s trading range for the past 52 weeks.
The first step is to calculate the annual range. Bitcoin’s 52-week range is 18923 (19862 – 939). Therefore 50% of the range is 9461. The long-term trend is bullish if BTC stays above 9461. At least for now, bitcoin is bullish based on this simple “back of the envelope” calculation.
Is Bitcoins Price Decline An Issue?
Recently, many traders and speculators were fearful that bitcoin’s recent price collapse had marked the end of the line for this digital currency. Prior to bitcoin’s sharp decline, the vast majority of financial pundits and investment professionals were claiming that BTC was in the midst of a “tulip mania” bubble.
When the crash finally occurred, a large number of traders thought bitcoin would never recover.
History tells us that it’s actually quite common for this digital currency to suffer massive declines of 50% or more. Please review the following table.
Begin Date Price End Date Price % Decline
- 06/09/2011 29.58 – 11/17/2011 2.23 – 92.4%
- 04/09/2013 213.72 – 04/16/2013 65.39 – 69.4%
- 04/24/2013 150.41 – 07/05/2013 70.82 – 52.9%
- 11/29/2013 1135.45 – 01/14/2015 172.45 – 84.8%
- 12/18/2017 19862.00 – 02/06/2018 5963.26 – 70.0%
Since its inception in 2009, BTC has experienced five major declines of greater than 50%. This includes the most recent decline of 70%. Each brutal price decline was eventually followed by a new all-time historic high.
Based on this information, bitcoin will ultimately exceed its high from December 18, 2017.
Of course, the million dollar question is, “Did the digital currency form an important bottom on February 6th?”
The best way to answer this question is to examine the previous data.
In percentage terms, bitcoin’s average price decline is 74.8%. This number was gathered from the four prior declines. The most recent slump was exactly 70%, which is very close to the historical average of 74.8%.
Consequently, it’s probably a safe bet that bitcoin will not drop below 5963. Most likely, the low is firmly in place @ 5963.26.
How long will it take for BTC to generate a new high above 19862? The historical data concludes that it takes bitcoin 651 days to generate a new all-time high (after falling by at least 50%). Therefore, we can conclude that bitcoin will form a new high in February 2020.
Clearly, this is purely speculation. Obviously, it’s impossible to forecast bitcoin’s next big price move. However, historical research suggests a new high will occur within the first few months of 2020.
The State Of Bitcoin – Executive Summary
- BTC futures will continue to add stability and transparency to all digital currencies
- Based on a series of technical indicators, the short-term trend is bullish
- All of the momentum indicators are bullish
- The current strength of the short-term trend would suggest a penetration of 12998
- The short-term chart pattern is bullish as long as bitcoin stays above 7204
- A weekly close below 7204 opens the door to 5112
- The long-term trend will remain bullish if BTC stays above 9461
- Bitcoin has experienced five price declines greater than 50%
- The average price decline is 74.8%
- Most likely, bitcoin formed an important bottom on February 6th @ 5963
- Historical research suggests that BTC will form a new all-high in Q1 2020