Bitcoin went berserk. At least in the eyes of cryptocurrency bulls. But what’s happening now is an extension of what’s been going on in the Bitcoin market for months. And the current situation, with all it’s extreme signs, actually points to one more likely specific outcome.
You have got to love it. As Bitcoin depreciates, stories of “why” this has been happening are cropping up like mushrooms after rain. The one development that is liked to the slide in the price of digital currencies is the ongoing quarrel in Bitcoin Cash, one of the forks of Bitcoin. In an article on the Forbes website, we read:
Bitcoin, along with other major cryptocurrencies ripple (XRP), ethereum, bitcoin cash, stellar, and litecoin, have fallen again over the last 24 hours as investors and traders fret over a flood of warnings on the future of cryptocurrencies.
The bitcoin price has been dropping since a civil war in a fork of bitcoin, bitcoin cash, led to the smaller cryptocurrency splitting again in two last week. The bitcoin cash so-called hard fork, a consequence of the coin's developers and miners being unable to agree on a direction to take the cryptocurrency, resulted in the creation of bitcoin ABC and bitcoin SV.
The two continue to battle it out for dominance, waging what's known as a hash war, as each tries to gain the upper hand in computing power and take control of the bitcoin cash network.
This is a very appealing story. There’s a battle in Bitcoin Cash and it spills over to Bitcoin itself and to other digital currencies. The main problem with this narrative is that the whole Bitcoin Cash market is now a bit over $6 billion versus almost $90 billion for Bitcoin itself. This means that the market cap for Bitcoin Cash is around 7% of Bitcoin’s market cap. So, there’s only so much influence Bitcoin Cash can have. Also, it’s not even clear that it really is the situation in Bitcoin Cash that’s driving the market now. It might be, we can’t be quite sure.
What’s more important than the precise trigger behind the recent move is the fact that the bearish situation had persisted for some time and now, for whatever reason, we have seen a trigger. The move down unfolds and the mainstream media have picked up on Bitcoin’s witness. But are there any indications left for the Bitcoin market? We tend to think that there are.
On BitStamp, we see that the depreciation that we described in our most recent alerts didn’t stop, but rather unfolded in another wave to the downside.
We see that Bitcoin went down from around $5,500 to around $4,200, and back to around $4,700. This means that if there ever was any doubt about the importance of the recent breakdown below the 100% Fibonacci retracement level based on the July rally, they are now mostly gone. This is an extension of the previous bearish indication after the breakdown as the move down was extended.
The action visible on the short-term chart above is pretty self-evident. Namely, Bitcoin departed from its previous sideways trend. Such a departure was likely to result in a more sizable move and we described the situation as one where bearish indication took precedence over bullish ones. And, as it turned out, the following move was steep and to the downside. But the short-term chart also reveals that the RSI is now at the lowest levels in months and this might be construed as a sign that the selling power is drying up. But is it? A look at the long-term chart might provide us with a suggestion.
Low from the Past
On the long-term Bitfinex chart, we are seeing the magnitude of the recent move down. It is clearly visible even from the long-term perspective.
The move below the 78.6% Fibonacci retracement based on the long-term rally from $3,000 to $20,000 is very visible and, for all practical purposes, confirmed. The move down has so far transpired on volume decidedly higher than what we had seen in the preceding months. These are all bearish indications. But there’s more.
We have drawn an additional horizontal line representing the level of the November 2017 low around $5,400. Bitcoin went below this line earlier today and it looks like it might stay below it. This would be a bearish indication. Bear that in mind.
Now, a direct reply to the question about whether the selling power is about to expire based on the extremely negative reading of the RSI. Yes, Bitcoin is in an extremely oversold position, more so than it has been in years. Perhaps this is the most oversold Bitcoin has been since 2015. Let this sink in. This points to a potential turnaround and a significant one at that. This is clearly bullish, together with the fact that mainstream media are now on Bitcoin again with stories about the bearish nature of the market.
However, there is one caveat to the answer. We are after yet another major bearish breakdown (Novemeber 2017 low), which might be confirmed in the next couple of days. If it is confirmed, the next support for Bitcoin is at the level of the mid-September 2017 low. The level from which the rally to the all-time high gained momentum. So, in the current environment, it seems that even if a strong turnaround materializes in the next couple of days, it might be worth to wait for it to be confirmed. If it’s not, then Bitcoin might be open to a move even lower. And based on the current breakdowns and the way corrective upswings worked within major declines in the past, this is the more likely outcome, in our opinion. This would mean that the hypothetical short positions, initiated with Bitcoin in the $10,000-11,000 area, are about to get even more profitable.
Summing up, we could see a corrective upswing in the next couple of days but it is our assessment that it could be followed by even more declines.
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Bitcoin Trading Strategist
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