More Clarity for the Short Term for Bitcoin

Bitcoin has been on the move down from $10,000. The recent couple of days, however, saw the decline decelerate. Does this have any bullish indications for the currency at the moment. We actually do have some strong ideas on this question and on the possibility that we might have already seen a local extreme. We would like to share them in this alert along with thoughts on our already profitable hypothetical positions.
It’s really hard to put a reasonable number down as far as Bitcoin’s value is concerned. This doesn’t stop people from taking a crack at it. On the Forbes website, we read:

Cryptocurrency analysts Fundstrat think they have found a way of predicting the future price of Bitcoin. They used the expected path of breakeven Bitcoin mining costs to forecast that Bitcoin will reach $36,000 by the end of 2019 (…)

But this method has come in for considerable criticism from the Bitcoin community. On Twitter, Samson Mow, chief strategy officer of Blockstream, claimed that Fundstrat's forecast relied on a controversial economic theory (…)

The “labor theory of value” essentially says that the price of a good or service is determined by the work required to produce it. It is popular with Marxist economists, but most other schools of economics have abandoned it in favour of “subjective valuation” which says that the value of a good or service is whatever someone will pay for it, regardless of the effort that went into producing it. Mow’s argument is that subjective valuation is the right way to understand Bitcoin’s price dynamics, not the labor theory of value.

Intuitively, the price of any given asset depends on the cost of production only to an extent. Usually, no one will produce anything which they can’t sell for a price above the cost of production. At the same time, if a good is sought for and people want to pay a lot for it, the price can go up considerably irrespective of the cost of production.

So, we would be very careful about claims that Bitcoin will trade at historical multiples of price to mining cost. Shifts in demand and supply might shift the multiple up or down. The multiple analysis might have some long-term implications but they are a lot weaker than one might suspect after simply reading about a $36,000 price target.

The one thing we think it is important to pay attention to as far as mining cost is concerned is the breakeven mining cost across countries as it might provide us with a level at which miners start to pull out of the Bitcoin market. If the price of Bitcoin falls below the breakevel level, miners might abandon their mining operations, depending on the local cost of electricity. If the number of miners leaving the market is large, the network might experience further mining concentration, which might not be great for the stability of the network. Again, this is not of immediate concern to traders but definitely something to keep in mind and check from time to time. And this is precisely why we are monitoring such developments in the market for you.

Decline in Bitcoin Followed by Some Appreciation

On BitStamp, we saw a relatively significant move down from $10,000, to around $8,000. This was fallowed by some appreciation in the last couple of days. Are we seeing a meaningful reversal?

In short, there’s not much to support such a point of view, in our opinion. First of all, even if we take a look at only the recent rally from around $6,500 to around $10,000 (April-May) and draw the Fibonacci retracement levels on the short-term chart, we see that Bitcoin is now below the 38.2% retracement level based on the April-May rally. This means that even from the short-term perspective, we don’t see a lot of evidence of a reversal to the upside. What we’ve seen so far supports a further move to the downside as the breakdown below the 38.2% level is now verified.

If we look at different Fibonacci retracements drawn based on longer time horizons, the implications do not change and we haven’t really seen any important breakout suggesting a move to the upside. To the contrary, all the short-term signs point to the downside.

Have We Seen a Local Top?

On the long-term Bitfinex chart, we can compare the recent move down with other moves we had seen previously. In general, the recent action is nothing spectacular. But it might be at least mildly important for the next move in the market. What we saw during the recent rally was a breakout above the 78.6% Fibonacci retracement, which could have been viewed as a resistance level. This was not a very bullish development as the level is not a particularly important one as far as strong moves up are concerned but  what followed does have bearish implications.

Namely, Bitcoin reversed course, move down below the 78.6% retracement and invalidated the breakout above this level. Even though the level itself is not of primary importance, the whole move adds to the bearish implications. This might mean that the recent move up is over and we might have already seen a local top at around $10,000.

Mind that all the other implications based on Fibonacci retracements are bearish and actually have been bearish for some time now. Adding to that, we are below the new declining trend line based on the entire decline from around $20,000 and below the rising support level based on previous local lows. It does seem that the local top might be behind us and Bitcoin might have more room to decline, and the profits on our hypothetical positions might grow even further.

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