Bitcoin’s rally may be over

The cryptocurrency’s crash should come as no surprise to its sceptics

Published - January 19, 2018 12:15 am IST

Bitcoin, the popular digital currency whose meteoric rise in price last year surprised many of its critics, has lost almost half its market value in just the last month. The price of bitcoin dropped from its lifetime high of over $19,300 in mid-December to below $9,300 on Wednesday and has since been trading in a volatile manner around the $10,000 mark. Yet some bitcoin enthusiasts still believe that the currency may only be consolidating to begin its next huge rally to the sky. A look at the price chart of bitcoin, however, suggests that there could be some valid reasons to get worried about the strength of bitcoin’s price rally.

The digital currency, since it hit its peak price last month, has struggled to maintain its uptrend. Each time it has tried to rally upwards, the price has failed to go past its previous high and subsequent corrections have been severe enough to push the price below its previous low. Such price behaviour, of making lower highs and lower lows, is typical of a downtrend in the price of any security. Further, at its current trading price, bitcoin has broken well below its bullish trend line in short-term charts and looks set to do the same in longer-term charts. Bitcoin’s bearish price behaviour in the last one month is in direct contrast to its monster rally last year when its price showed a clear uptrend marked by higher highs and higher lows. That is, after reaching a new high, the ensuing correction was not severe enough to push the price below its previous low.

Time for prudence?

In hindsight, if you were a speculator simply looking to make a quick buck without any care about fundamentals, a good time to buy bitcoin was when its price action showed a clear uptrend in price, which was over most of last year. Now, when its price is showing clear signs of reversal, a prudent speculator is likely to keep away if not go short on the digital currency. This is not to completely rule out the possibility that bitcoin might stage a surprise comeback, as it has in the past after severe price corrections. People buying bitcoin at the moment in fact believe that they are simply buying a temporary dip in its price before the next huge rally.

All said and done, bitcoin’s present crash should come as no surprise to its sceptics. For one, the digital currency, which is supposed to derive its value from its use as a medium of exchange, has had negligible acceptance in the real world of commerce. Second, it has always seemed foolish to think that governments, which fancy their monopoly power over the issuance of currency, would be ready to allow private currencies to compete against national currencies. Bitcoin’s price action over the last one month should offer immense solace to the fundamental investor who will be glad to see its price gravitating towards its true value.

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