(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Bitcoin could fall by nearly 30 percent back toward $3,000 based on its technical chart. The digital currency with no physical paper or coins has the backing of no government, and has no outside physical force such as interest rates or national account balances that are pushing or pulling on the price. It seems that Bitcoin’s volatility may be a case of supply, demand, and mostly emotion, judging by the way it trades. This means that Bitcoin is more likely to trade like a commodity and is more liable to be impacted by the technical patterns in the chart.
Potential Technical Breakdown
Bitcoin is up by nearly 360 percent year to date and trades at $4,300. That’s an astronomical rise. But that may change, as the chart above shows the technicals do not look favorable to the price of Bitcoin. There appears to be a topping formation circled it green, which could be creating a bearish technical pattern called a head-and-shoulders pattern.
Additionally, the red lines are forming a technical pattern called a rising wedge, which is a reversal pattern signal. This suggests Bitcoin could be on the verge of a falling lower. The Bollinger Band, which is a measure of historical volatility, has contracted materially and could be a sign that the cryptocurrency could be setting up for a period of increased volatility. Contracting Bollinger bands are a sign of decreasing volatility, while widening bands are a sign of increasing volatility. All the pieces on the chart come together to suggest that Bitcoin is likely to see downside risk back toward support at $3,000.
Resembles a Commodity More Than Currency
There is a finite supply of Bitcoin, with 21 million to be created, making it look more like a commodity such as gold or oil, as Investopedia previously noted. (See: What Happens to Bitcoin After All 21 Million are Mined?)
But there is one significant difference. We do not technically know the amount of undiscovered gold or oil there is, but we do know how much Bitcoin is left to be found. According to the website Blockchain, there has been nearly 16.5 million Bitcoin mined. Like most commodities, Bitcoin is a finite resource in a sense, meaning it is likely to trade mostly on pure supply and demand, but that balance has yet to strike.
As the number of Bitcoin discovered increases and gets closer to the 21 million mark, miners could get more aggressive in finding Bitcoin, and give traders a sense of urgency in trading the cryptocurrency. All this makes the trading in Bitcoin very emotional. It is likely at some point in future that Bitcoin will trade more similar to how gold trades, where one ounce of gold equals a particular dollar amount.
Because Bitcoin does not have the fundamental aspect to fall back like a traditional currency, it is more apt to trade on supply and demand resembling that of a commodity, which also means that the technical patterns could dominate the way it trades. But for now, the step up in Bitcoin seems to signal a pullback will happen. But when emotions are involved like in Bitcoin trading, anything is possible.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company’s actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer’s bio and his portfolio’s holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.