The Bitcoin price has been in decline for almost 10 months. The protracted decline had crashed in stages, accompanied by various news events and pivoting around the $500 price level and crossing over it several times during the past year.
Analysis below discusses the reasons for the decline, as well as the factors that are popularly believed to have caused the successive price crashes. Future scenarios are considered, including Bitcoin price forecasts.
Blame It On China
However, on closer inspection (click the chart on the right), it is apparent that the all-time high was made on 30 November 2013. The all-time price high is accompanied by a decisive instance of divergence in the MACD (and RSI) indicator - a technical sell-signal that market traders act on, without question, whenever it manifests in a price chart. The warning of risks associated with cryptocurrency investment, as well as exchange restrictions imposed by the PBoC, only came out of China five days later when the Bitcoin crash had already embarked on its third wave of decline.
There is no question that Bitcoin market participants acted (by selling their bitcoins) following the announcements out of China. It is evident from the chart, above, that the market top and ensuing decline preceded news out of China by five days. The Bitcoin crash was already underway.
Why Did Bitcoin Crash?
Before we can answer the specific question as to why Bitcoin crashed, we have to consider the general case of why markets even go up and down at all. Opinion is varied and theories abound - some saying that markets advance and decline according to an inherent logic, while others say that markets are chaotic and merely exhibit "random walk".
Waves of Price Movement
The most rational explanation of market behavior, is arguably, Ralph Elliott's Wave Principle. Originally postulated in the 1930s and confirmed by many theorists via many empirical studies since, the Elliott Wave Principle holds that dynamic entities such as markets advance and decline according to an internal logic governed by group psychology that, in turn, adheres to Fibonacci ratios.
Typically, markets advance in five waves of price action and then decline in three waves before starting the next five waves of advance - each wave related to adjacent waves by the Fibonacci ratios .382, .5 or .618. Furthermore, a market instrument, such as the Gold price or the Bitcoin price, is (from the Wave Principle perspective) a group-psychological entity in which market participants herd and scatter according to their collective hopes and fears in the market.
Madness of Crowds
Once a price advance has rallied to a level that the market collective deems good for profit-taking, individual market participants begin selling their holdings and, in stages, the entire group herds into profit-taking behavior.
A sell-off (or crash) phase follows until some of the market participants deem the lower price to represent a bargain buying opportunity. This process can happen once or may repeat several times before the group's mood shifts away from fear of additional decline toward renewed hope of a glorious rally.
And so it is with the Bitcoin speculative market.
Market corrections typically happen in three (or sometimes five) waves. These stages of decline can be seen to change their character in three pragmatic phases:
- Profit Taking
- Panic Selling
- Bargain Buying
"Up More, A Little to the Right... Perfect!"
Buying and selling activity, throughout the above mentioned phases, can be seen to target (and reuse) certain price levels, called support and resistance levels. These levels are characterized by either being Fibonacci ratios of adjacent waves of advance and decline, or they may be round numbers - typically: 250, 500, 1000, etc.
By drawing the most salient levels of support and resistance on the Bitcoin price chart, we can see that the $500 level has featured as an important pivot during the past ten months of decline.
The Bitcoin chart above is that of the Bitstamp exchange's BTC/USD price and it is represented in standard format. Notice how the lower price levels on the left of the chart become indistinct due to the dominance of the larger price waves on the chart. It is therefore customary to render price charts with a large range in logarithmic scale to obtain a more useful comparison of relative price action at both lower and higher price levels.
The following chart shows the Bitcoin price history since late 2011. The price levels of the support and resistance lines drawn on the chart above remain unchanged but are displayed in proportion to prior price waves at lower levels. In this context it is evident that the Bitcoin price has rallied and crashed on several occasions in the past - and that the current Bitcoin crash is not more severe than previous corrective phases in the chart.
Significantly, the logarithmic scale chart also dispels the myth that "Bitcoin is in a bubble". Those critics and ignoramii who are eagerly anticipating a Bitcoin crash are waiting in vain:
- the Bitcoin price will continue advancing indefinitely (with intermittent corrections, naturally)
- unlike Gold, the value of Bitcoin is neither aspirational nor endowed - it is pragmatic and disruptive - as both an innovative payment network (currency) and a medium of wealth storage and transmission (commodity).
Market decline usually terminates once price has retraced a Fibonacci ratio of the preceding advance, typically 38.2%, 50% or 61.8% or when price encounters a channel trendline. In most cases the level at which price encounters a channel trendline is also one of the Fibonacci ratio levels mentioned above. The following Gold price chart illustrates the phenomenon of price unfolding between parallel channel lines.
Shape of Things to Come
By drawing two sets of fitting channel lines on the Bitcoin price chart, we see what prospects await the Bitcoin price.
Depending on whether market participants choose to capitulate the red or purple channel, the Bitcoin crash (decline, to be correct) may continue to $200 (lower red trendline) or the decline had concluded on 19 September 2014 (at the lower purple trendline).
If you're looking at the latter scenario (purple channel) and thinking: it's time to buy bitcoins - think again. Nothing precludes the red channel scenario from capitulating now or at some point in the coming weeks or months. Similarly, if the red channel seems to offer a high probability opportunity to buy cheap bitcoins then consider - should price fail to make the southward journey - how far you would let price advance before buying into the market?
It's a dilemma of ambiguity and uncertainty. The manner in which to take advantage of the juncture of the red and purple channel scenarios is to, firstly, acknowledge the ambiguity and to then identify the conditions that would confirm one scenario, as well as the conditions that would invalidate the other. Confirmation/invalidation conditions and rule sets need to be logically and clearly defined for both channel scenarios. A trading plan is mapped out and managed from these building blocks. The trading strategy we follow, therefore, takes advantage of both potentialities instead of being just a hopeful one-way bet.
Readers can follow Bitcoin price analysis updates each weekday on CCN. In-depth analysis articles are published every Sunday.
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Take care only to take action in the market when you are 100% sure of your trading strategy. CCN accepts no liability whatsoever for losses incurred as a result of anything written in this Bitcoin price analysis report.
Bitcoin price charts from TradingView. Images from Shutterstock.