This article was written exclusively for Investing.com
Bitcoin has stabilized after last week’s sharp sell-off, but is there going to be more short-term pain before we see long-term gains, or is the selling already done?
After last week’s sizeable drop, Bitcoin has struggled all week to get going. Every recovery attempt has been futile. Similar price action has been evident in the stock markets, precious metals, and some fiat currencies.
This is yet another example of asset prices becoming increasingly correlated, which in my opinion is all to do with central banks intervening to fix an unfixable financial system. Money printing must continue to ensure the economy and the markets keep ticking over.
Underscoring this view, have a look at the correlation table below, showing how positively-correlated Bitcoin has become with both gold, a perceived haven asset, as well as riskier equity markets:
Source: www.tradingcandles.com and oanda.com
The key takeaway points from the above correlation table are:
- Bitcoin has a positive correlation with stocks and gold over various time frames
- The correlation is stronger over longer periods, especially over the last 3-6 months
- Bitcoin has a stronger positive correlation with the tech-heavy NASDAQ 100 than the S&P 500, pointing to insatiable appetite for fintech in recent times
- Whatever view you have on Bitcoin, the direction of stock and gold prices need to be taken into account
Indeed, as the table above proves, while Bitcoin may be viewed by some as a safe haven asset, it is also a discretionary purchase for many.
At times like now, not many people will be willing to buy something that is prone to cyber theft with their hard-earned cash. Not when it costs in excess of $10,000.
Recently, global data has softened again as new COVID-19 cases have risen sharply again across some major European nations. Investors are fearful that the recovery may have already stalled and are thus being more cautious.
Yet at the same time, Bitcoin’s appeal as both a haven and risk asset keeps it supported, especially as unlike other assets the supply of the digital currency is limited. This makes it fundamentally bullish long-term.
In the short-term however, there is a risk we could see further weakness due to the above concerns, and as price action is looking quite heavy.
It should be noted here that a correction is not necessarily a bad thing insofar as the long term is concerned. Corrections allow more participants to join the game at relatively inexpensive levels. Corrections also help to remove some froth and excessive speculative interest which can prove damaging, as crypto enthusiasts found out in late 2017 for example.
From a technical point of view, Bitcoin was doing really well earlier in the year and managed to break above its long-term bearish trend line in July, before peaking at just under $12,500 in August.
Since then, it has been struggling, with each recovery attempt proving to be short-lived after some of the key support levels broke down. That's most obvious in its chart:
One key support zone that it needed to hold above was around $10,430 to $10,540. However, after slicing below this last week, Bitcoin has now spent about 9 days unable to reclaim this area, making it a key resistance zone.
Thus, for the bulls to regain some control, the above-mentioned resistance area must give way soon.
Although BTC/USD has found a bit of support around the psychologically important $10,000 mark, the fact it is struggling to reclaim the above resistance, makes me wonder whether a decisive breakdown is in the cards now.
A decisive break below the $10,000 market would initially target $9750, a prior resistance level, potentially followed by the area between $9,000 to $9,200 next.
If it drops to here, this is where I would then expect to see renewed buying interest around, since many technical factors converge there. It is where the 200-day average meets the prior breakout area and the upper side of the broken bearish trend line from the 2017 peak.
So, there you have it. I have outlined both the bullish and bearish scenarios. Traders may wish to wait for either the bullish or bearish trigger, before speculating on the short-term direction of prices.
But let me be clear: while I have highlighted the risks of a possible correction in the short-term, I am bullish on Bitcoin in the long-term.