I have been looking at tradingview.com charts almost hypnotized for the last week, just to see this intriguing pattern developing before my eyes. While the rise of the bitcoin was breathtaking the downward trend also is equally spectacular. But; why did it reverse course exactly at €6,000.00? How can it half in value in just 2 weeks time and then at the flick of the fingers start to rise to above €8,000 (a 30%+ rise in less the 48 hours) again without any reasonable explanation for reason or event (see above graph)? How far will it continue to slide? Or will it blow the roof? But why does it not just crash? Is bitcoin’s price trend just mass psychosis? Questions abound.
Screening a boatload of blog posts about bitcoin’s price development I read a lot of stuff based on “technical analysis”. Resistance levels here, price targets there and wishful thinking everywhere.
This one – even how moderate and natural in tone – is signaling the desperation nicely with a fair amount of introspection posing some relevant questions:
As we move into a fresh week of trading, nobody really knows where price is going near term. Some analysts suggest that current levels are a major support region and, when looked at against the backdrop of a traditional technical analysis approach, this seems valid. With that said, however, the traditional technical analysis was built around traditional assets, so while it can be useful, it would be foolish to assume it’s failsafe.
So, all we can do is set up against the action we are seeing and hope that things don’t play out against our bias.
Technical analysis, or “chart reading”, is a very peculiar thing. By analyzing previous price developments, one tries to extrapolate future price developments. The graph then should indicate how the participants have acted with the assumption they will do the same in the future. “Chart reading” can work as a self-fulfilling prophecy. But the main question, of course, is whether bitcoin – as a non-traditional asset – can be captured with this approach.
While supply and demand will determine its price developments, the bitcoin is inherently unstable. When the price is increasing new money will be attracted. So, the price will go higher which will entice even more people to take a plunge in the warming bitcoin pool. There is fundamentally no balancing aspect that will dampen this as to reach a more stable equilibrium. When prices start to grow exponentially the craze gets out of hand. Until sufficient participants are cashing and the model flips over. But Bitcoin is a zero-sum game so when the price is dropping new money to invest in bitcoin will be harder to find. While at the same time exposed participants will increasingly want to bail out, depressing the price even more.
My hypothesis is that the day-traders have accelerated the price development in the period until December 17 when bitcoin reached its peak. While since the bitcoin started to slide they have been dampening the development. My reasoning is that these day-traders are looking at the latest fluctuations only to just to make a bug by selling and buying at the right micro-moment. By doing so they are forming the demand for bitcoin with their own “play money”. One could consider this money already involved in bitcoin. Without the day-traders there would be a lack of demand and the price would have plummeted faster and hence deeper.
I have read posts signaling a desirable future price level in the single or double digits. But also people indicating that it will reach €50k before the end of the year. For bitcoin as a currency, a much lower price would be great, especially when this would be coupled with price stability. But for its role as a value store that would be disastrous. At the other hand the price volatility is pretty much unworkable as a operational currency…Well, let’s wait and see.