The market for bitcoin is becoming more and more compressed. Bitcoin has been squeezed ever-tighter for much of this year and this stored energy will surely be released at some stage, manifesting in a violent lurch in one direction, up or down. But which way are we heading?
Chartists would favour a break to the upside; after all, the market continues in a broad uptrend despite a two-thirds loss in value since December (at $6,600, bitcoin remains up 1000 percent over the past two years). Chartists might also point to the bitcoin bears’ inability to breach $6,000 this year despite half-a-dozen attempts as reason enough to favour higher prices.
The problem with bitcoin is that it is overwhelmingly driven by investor sentiment. There is, at this time, little use for bitcoin other than as a speculative vehicle—a point rammed home by Goldman Sachs in early August when it said “cryptocurrencies do not fulfill any of the three traditional roles of a currency”; they are “neither a medium of exchange, nor a unit of measurement, nor a store of value.”
Echoing that view this week is Peter Stephens of the American financial advisory The Motley Fool.
“The real-world potential for bitcoin seems to be somewhat limited. Its lack of infrastructure and a limit on its scalability could mean that it fails to replace traditional currencies in the long run. As such, it seems to have limited practical value and may continue to be seen as purely a speculative investment,” Stephens writes.
A realization of the above is perhaps why institutions have turned cool on bitcoin in recent months. Goldman Sachs, for one, recently scrapped plans for a bitcoin trading desk.
Weighing on bitcoin, too, is the discouragement being offered up by regulators.
“Bitcoin . . . exists in the wild west industry of crypto assets. This unregulated industry leaves investors facing numerous risks,” Nicky Morgan, chair of the UK’s Treasury select committee, said last week.
Morgan cited “high price volatility,” the “hacking vulnerability of exchanges” and bitcoin’s “role in money laundering” as reasons for greatly enhanced regulation.
Although many bitcoin forecasts continue to suggest far higher prices ahead, these are all-too-often coming from those with stakes in crypto exchanges, crypto fund management firms or other entities that would benefit from high participation in crypto assets. These recommendations to buy bitcoin come, therefore, attached with an obvious conflict of interest.
In the absence of a crystal ball, bitcoin speculators might be best letting the market decide in which direction to get involved. A breakout buy-stop order placed $400-$500 above a down-sloping trendline over recent peaks, such as that pictured in the chart above, together with a breakout sell-stop order at $5,600, would stop speculators into the market so that they might take advantage of an explosion in volatility, at which point orders on the opposite side of the market could be cancelled.