Believe it or not, I’m still bullish on cryptocurrencies, at least the major credible ones. Despite my consistent optimism, though, even I have to admit the recent cratering of the bitcoin price is discouraging. Since the benchmark blockchain token tumbled in November of this year, its price tag has held steady at above $7,000 in the last few weeks.
Unfortunately, that critical psychological support line did not hold. At time of writing, the price of bitcoin is treading water around $6,700. But given the panic that has gripped cryptocurrencies, this is unlikely the bottom. As we’ve seen in 2017, good news can spike market valuations in the blink of an eye. However, as in 2018, the opposite is also true.
Naturally, the question everyone has asked is, what the heck happened? Frustratingly, a logical explanation is not readily apparent. However, some have theorized that a Chinese crypto Ponzi scheme may have damaged the bitcoin price.
Similar to the BitConnect scheme, PlusToken promised generous monthly returns in exchange for purchasing its namesake digital coins. Through this scam, the PlusToken founders made off with $2 billion of bitcoin, ethereum and other cryptocurrencies.
However, the Ponzi collapsed in late June of this year. In a mad scramble, the founders dumped their cryptocurrencies, which negatively impacted the price of bitcoin. Some of the founders were caught and extradited to China. Nevertheless, the digital money trail remains active, suggesting another dumping could occur. Obviously, that wouldn’t help the bitcoin price.
But is this the cause of the current panic? I highly doubt it. Not only that, I don’t think it matters. As I’ll explain below, the bitcoin price is probably just consolidating.
View the Bitcoin Price in the Right Context
Although it’s tempting to write off cryptocurrencies because of the severe drop in the price of bitcoin, such a sentiment reflects old school thinking. Bitcoin, though, represents a new paradigm. For example, unlike a traditional equity investment, crypto markets trade 24/7: there are no breaks, no enforced cool-down periods, no holidays, nothing.
Because of this unique dynamic, bitcoin is the freest of free markets. If you want to know what the world says bitcoin is worth, just look at its chart. Right now, it’s a little under $6,700. But that could change dramatically after I’m done using the bathroom.
Such is the allure and the pitfall of cryptocurrencies. And the extreme swings are why gawking at the bitcoin price from a narrow perspective is inappropriate for most investors. You really must consider the bigger picture.
And what does that picture say? Analyzing the bitcoin price from a quarterly vantage point, the blockchain token is actually quite reasonable.
From my studies of technical analysis, I believe the price of bitcoin is charting a long-term bullish flag formation. To briefly summarize, a bullish flag is a continuation pattern. Following a massive spike up, the traded asset consolidates via sideways trading, thereby forming a “flag.” After the bulls have “recouped” their energy, they drive the asset to fresh highs.
Take a look at the explanatory link I included from Stockcharts.com and see if you agree. I’m confident that most of you will.
If this interpretation is correct, it’s not yet time to panic about the price of bitcoin. Rather, if the virtual currency falls below $3,500 (which is the average price during the third quarter of 2017), that might be the time to reconsider the bullish narrative.
Until then, the bitcoin price contextually still looks healthy.
Much Patience Is Necessary
While I believe the longer-term implications for the price of bitcoin is positive, the day-to-day trading is terribly ugly. Moreover, we live in the day to day. Thus, outright ignoring this framework’s volatility is unhelpful toward sympathizing with other bullish investors.
However, focusing too much on the daily swings may detract us from the next level higher. When you consider the gradual shift away from cash and toward financial digitalization, cryptocurrencies are becoming increasingly relevant. That their market value is presently depressed doesn’t diminish this broader fundamental catalyst.
So, for the risk-tolerant investor, all I can say is to be patient. Judging from prior trends, the bitcoin price will probably breakout of its consolidation in Q3 or Q4 of 2020 at the earliest.
That’s about a year away from now, which is a hefty opportunity cost. But I’ve seen so many crazy things in this market that this cost is well worth it.
As of this writing, Josh Enomoto is long bitcoin and ethereum.