The bitcoin bulls were back in force on Friday, as markets finally broke out of a prolonged stalemate that had kept price action fairly subdued. The rally, which occurred suddenly, threatened the underlying assertion that bitcoin still has room to fall before reaching a definitive bottom.
BTC/USD Price Update
The cryptocurrency market rose to nearly one-month highs on Friday in a rally that picked up speed around midday. Bitcoin printed a high of $3,800 on Bitfinex, having gained more than 8% during the session. Earlier in the week, bitcoin had traded at its lowest level in nearly two months.
Bitcoin was last seen trading just below $3,700 on Bitfinex, where it was little changed compared with 24 hours ago. Trade volumes amounted to $6.7 billion, down from a Friday peak of around $8.1 billion.
The Bullish Case
Bitcoin is still a long way away from its glory days, but the recent breakout suggests that the worst of the downtrend may be over.
The leading digital currency has witnessed a sharp drop in volatility in recent weeks. As Hacked recently reported, the 30-day volatility index has fallen to its lowest level in two-and-a-half months. This basically means that the magnitude of changes in the bitcoin price have narrowed significantly.
The sharp drop in volatility has been confirmed by SFOX, an institutional broker-dealer that analyzes a bevy of exchange data on bitcoin and other cryptocurrencies. Based on its January Volatility Report, SFOX said the top-four cryptocurrencies by market cap saw a major decline in volatility last month. As a result, the broker’s multi-factor market index improved to ‘mildly bullish’ from ‘mildly bearish’ previously. The shift in sentiment was noted in January prior to the recent recovery.
So, while volatility often works in favor of bitcoin, its decline during the depths of the bear market suggests that the bears are slowly loosening their grip.
But declining volatility is only the tip of the iceberg. For long-term investors, bitcoin’s fundamental picture is improving significantly as the market moves from a holding phase to a building phase. Case in point: Abra, the popular bitcoin wallet app, recently announced you can invest in stocks, exchange-traded funds and other cryptocurrencies on top of the Bitcoin network.
Optimism surrounding the recently resubmitted VanEck SolidX Bitcoin Trust has also boosted investor morale. While approval depends on a multitude of factors, it’s only a matter of time before the U.S. Securities and Exchange Commission (SEC) grants the first bitcoin ETF – at least, that’s the position of the Commission’s lone Democrat, Robert J. Jackson, Jr. A bitcoin ETF, when it gets approved, will make crypto far more accessible for mainstream investors.
More on this story: Crypto Markets See Modest Gains as SEC Commissioner Hints at Bitcoin ETF Approval.
What’s more, Ethereum’s upcoming hard fork could provide bitcoin and the broader market with another catalyst in the near term. Ether rallied into the anticipated Constantinople hard fork in January before the upgrade was postponed over security concerns. The hard fork is now slated to occur on Feb. 27.
The Bearish Case
A bear case for bitcoin is easier to justify than the aforementioned bullish scenario. This stems from the fact that bitcoin has been subject to false breakouts before, the last of which occurring in late-December/early-January.
According to Murad Mahmudov, a leading crypto analyst, bitcoin is still on track to establish lower lows unless price action can pierce through the 15-week moving average at $4,200. Even reclaiming this level wouldn’t negate the long-term downtrend. To do that, bitcoin must return above $5,500 and eventually $6,800, the 50-week moving average.
Even with the latest rally factored in, bitcoin is still in “hell,” based on Mahmudov’s classification. It must still go through “purgatory” before reaching “heaven,” which is $6,000 and above. This classification was outlined in a Feb. 5 tweet (chart provided below).
Of course, Mahmudov’s chart gives us a bearish short-term picture. Like many other crypto advocates, he believes bitcoin will soon turn parabolic and become the dominant virtual currency of the future.
It’s also worth mentioning that it was Litecoin that paved the way for bitcoin’s dramatic surge on Friday. Litecoin, also known as the silver to bitcoin’s gold, rose double-digits through the early part of Friday amid reports that the cryptocurrency’s developers were moving closer to implementing confidential transactions. This is seen as a crucial development in the battle to make cryptocurrency a more dependable unit of transaction.
If Friday’s rally was indeed a “false breakout,” bitcoin is likely headed lower in the near term. This means bitcoin is still in an accumulation zone, which allows long-term holders to cost average the virtual currency at attractive prices. Once again, this is bearish for the short term but bullish over longer horizons.
Disclaimer: The author owns Bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.
Featured image courtesy of Shutterstock.