Disclaimer: The information in this blog represents the opinions of its author and is for educational purposes only. It is not intended as investment advice. Cryptocurrency markets are extremely risky so you should only invest money you are willing to lose.
Explosive Move - Even For Bitcoin
The most famous crypto-juggernaut in history already had a rep for wild price swings, but when it blasted through the much vaunted $10,000 level on November 29th, it did so in an explosive move that was impressive even for bitcoin.
After crushing major resistance and a massive looming "sell-wall" at $10,000, bitcoin shot up to $11,485 on GDAX in just a few hours only to plummet nearly $3000 over the next 4 hours.
By the end of the day its price was still manically jumping around between $9,000 and $11,000.
Just a few days ago we were talking about the price of bitcoin in hundreds - 68, 74, etc. - now we're starting to talk thousands - 9, 10, 11 ... Now THAT'S a major milestone. Not to mention the fact that the cryptocurrency juggernaut which emerged from the shadows of the dark web is now bigger than McDonalds, Paypal, IBM, Disney, GE, Bill Gates, and 135 countries.
Uniquely Manic Volatility
Any market can experience price swings that are magnified by investor emotion, but bitcoin is particularly susceptible to manic volatility for 2 unique reasons.
Born From The Rubble
First, Bitcoin was born out of the rubble of the 2008 financial crisis. The people driving this bubble are the same average investors and homeowners who were decimated in that crisis and watched in horror as their tax dollars were used to bail out the same corrupt, greedy bankers who caused the crisis in the first place. For this reason, bitcoin's powerful upward momentum is fueled by optimism, hope, and faith in a revolutionary new monetary system.
Emerged From The Shadows
Second, it is extremely rare for any asset to have to dig itself out of such a deep hole of universally negative PR. Think about it - bitcoin has, almost overnight, emerged from the shadows of the dark web to become a beacon of optimism and hope that a revolutionary new math-based technology can replace an antiquated obsolete one in which a few corrupt individuals control the entire world economy.
Tsunami Of Cash
Bitcoin's price swings, already magnified by investor sentiment, are becoming even more so in anticipation of a tsunami of cash entering the cryptocurrency markets, whose total capitalization now exceeds $300 billion.
The Chicago Mercantile Exchange will start trading bitcoin futures next month, and Nasdaq plans a similar offering next year. Once futures come online, ETFs are sure to follow, allowing any investor to add cryptocurrencies to their conventional portfolio.
This is also a popular movement. Individual investors aren't waiting for the green light from the corrupt bankers they bailed out 10 years ago. Coinbase, the most user-friendly on-ramp to cryptocurrencies, added 100,000 new wallets in a single day over the Thanksgiving weekend rally to $10,000. The online wallet provider now boasts more than 45 million accounts.
So although the velocity and magnitude of the price moves are increasing, consistent wave patterns are still present and identifiable with meticulous mathematical chart analysis.
Stairs Up, Elevator Down
Bitcoin takes the stairs up, and the elevator down - so when the price is rising fast, always expect a sharp, lightning-quick retracement. These pullbacks can feel like free-fall for investors who bought at high prices and aren't accustomed to bitcoin's manic behavior, but they can also pinpoint excellent buying opportunities for smart traders.
Big Picture Thinking
Instead of panicking, the smart move is to take a step back and look at the big picture.
The first step is to identify the long term trend, which in this case is obviously a strong uptrend since the retracement to $2975 on Sept 15th.
Next look at the short-term trend, which began after the SegWit2x fork was called off and bitcoin retraced to $5511 on Nov. 12th.
Identify Inflection Points
Once the trend and inflection points are identified, we use trendlines and Fibonacci retracement levels - which are mathematical formulas that model and quantify human behavior - to identify bounce points in specific target zones.
The charts above show a convergence of support formed by a trendline and a major Fibonacci retracement level calculated from the intermediate term uptrend. This is a high-probability bounce point in the $9150-$9200 range.
After bouncing off this convergence several times this morning, bitcoin started to move higher. Ideally we like to see a series of at least 2 higher highs followed by higher lows before confirming a resumption of the long-term uptrend.