Bitcoin Getting Ready for Another Spectacular Decline


*Update from original post. Weekend move puts wheels in motion.

OPPORTUNITY - Here we go again! I've been watching this move for some time and while I recognize the value in the cryptocurrency, and more importantly, the technology it rests on, the opportunity to be fading extreme moves continues to present. It's true, the market continues to push higher and higher. But making money in intense uptrends can also be achieved on the short side. As strange as it sounds, some of the best opportunities come when a market is moving aggressively in one direction and you take shots fading the moves.

>90 is >90 - In our last update, we had talked about the move needing to stall out above $2200 in favor of a drop back towards $1000. While we didn't see the drop to $1000, the market did offer a very healthy decline into the $1800s. There was no trade at that time, but we were looking for an opportunity to fade the move, as we have done in the past. And now, we're at it again. The technicals are tracking at astonishing levels, with the monthly RSI above 90!! Of course, it's a different type of liquidity than traditional FX, but at the same time, it's a monthly RSI above 90!!

THE PRICE ACTION - The market had been consolidating between $3500 and $3200 this past week, before breaking out to another record high. And so, after a minor consolidation, this latest upside break has now opened a move through $4000! But now that we're up here, I would be looking for a very nasty, jackknife reversal that could easily take us down 50%! And this is all just looking at the technicals. I haven't even addressed the fundamentals yet. 

BIG PICTURE - Fundamentally, there is definitely a market here and one that won't go away. Blockchain technology and its capabilities that extend way beyond digital currency are fascinating. The idea of cutting out middle men and transacting peer to peer is one that will be embraced by all. The idea of a technology that will dramatically cut costs, because it automates a process, that up until this point, has drained us of excessive, unnecessary costs, is not an idea that will be heading for the exits. 

THE SHADY - But the trouble is, we simply aren't there yet, and there is just too much crap out there feeding into what is a massive bubble. Sure, the bubble can get bigger...and it has...but it's still a bubble. There are too many scams and pyramid schemes and just not enough good information. One of the most frustrating things about this new technology is that no one seems to be able to articulate in a clear way what it's all about. Everywhere you go, you're always reading the same definitions and you walk away feeling stupid because it's the same definition everywhere and you still don't get it!

$BTCUSD monthly RSI>90! Recognize not traditional #FX liquidity, but at same time, big reversal coming.  Via @joelkruger

EDUCATION - But that's not fair. The truth is, it's a function of everyone pulling from the same definition because no one really understands and no one wants to (most don't). Most out there just want to capitalize on this technology that is the next great frontier. Right now, we need better education in this space and we need to see a lot of the bad flushed out before we can have that serious conversation. But this is definitely for real and it's definitely going to have a major impact on the world going forward.

NO YELLOW SHINE HERE - I would also contend that as much as Bitcoin may have qualities that make it attractive in risk off settings, given the way it is structured and the way it can be compared to an asset like GOLD as an alternative hedge......it is not GOLD! Perhaps down the road, this asset will be an effective hedge in risk off markets. But right now, this is an asset that I believe will be exceptionally vulnerable in a risk liquidation environment.  

GLOBAL MACRO - Again, it goes back to the fact that so many involved right now aren't in it for the right reasons and too much capital has been allocated to projects that won't be able to succeed when things get tough out there. I do believe we are headed for a period in the months ahead where monetary policy normalization has a negative impact on equity markets. Stocks have been artificially supported to record highs on the back of unprecedented monetary policy accommodation and the removal of this stimulus, no matter how slow, will start to have a negative impact. Fed balance sheet reduction is just one of those potential catalysts around the corner. 

A MEAN REVERSION - So there you have it. Bitcoin is up again, but this kind of up usually translates into an ugly down. Maybe the down doesn't last long and we shoot up again. But if you pick your spots and apply the appropriate risk management, there is a lot of opportunity to be making money on the short side of this trade. You can't just jump in anywhere. But when you see things like a monthly RSI above 90, what follows is either  - at worst a period of consolidation - and at best - a very scary run for the hills kind of drop.

STRATEGY - The weekend move has been insane, which is not all that surprising, because it's the weekend! When the FX market opens Monday, the recommendation is to sell any price at or above $3800 with a stop-loss on a daily close basis above $4300 (revised from pre-weekend), in anticipation of a fall back down towards $2000. This doesn't seem like a crazy scenario in my opinion. Just structure the risk like anything other position. Don't bet the house! Allocate X percentage of equity to the position and see what happens. This is market that is liquid enough that if you structure it like this, you should be able to exit between quite easily if it doesn't work out.  I'd also recommend moving the stop to cost once below $3400 (revised) and then continuing to trail incrementally as it moves lower. So think about it. It's definitely compelling. If you do take a shot, love it...hope for the best...and expect the worst. This way you'll be feeling good whatever happens.