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A “Flash Crash” Scenario Looms Over Bitcoin; Here’s Why

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Bitcoin may undergo a significant price correction before the US presidential election due to its proximity to gold, hints Clem Chambers.

The CEO of ADVFN – Europe’s leading stocks and shares website, told Kitco News that most assets that have shown a positive correlation during the 2020 bull run tend to fall in tandem. He spoke about gold and how a “flash crash” in its markets could leave other assets in a similar bearish spell.

“I got a warning from the market about ten days ago…so I cleared the decks because I think it’s highly likely, not absolutely certain, but too likely to be in the markets that we’re going to be in for a crash,” Mr. Chambers said. “Normally before a crash, I experience what I call a market malfunction where my portfolio just doesn’t behave as it should.”

The Tale of Two Safe-Haven Assets

Bitcoin laggingly tailed gold, especially since the March 2020 global market rout wherein both the assets crashed in tandem. At one point this year, the short-term correlation between the cryptocurrency and the precious metal reached an all-time high of 75 percent.

The proximity grew mainly because of a growing demand for safe-haven and riskier assets amid a bearish US dollar outlook. The Federal Reserve’s unprecedented monetary policy, which includes an open-ended bond-buying program and near-zero interest rates, lifted the appeal of cash and cash-based instruments, such as US government bonds.

Anticipating short-term low yields, investors decided to offload their dollar positions for gold, Bitcoin, US stocks, and other assets.

Bitcoin is down 13% from its year-to-date high near $12,500. Source: TradingView.com

Nevertheless, the Fed warned last week that it could not continue its expansionary program without further monetary help from the US Congress. Its chair Jerome Powell requested the House to release the second coronavirus stimulus package. It is the aid that remains in a deadlock as the Democrats and the Republicans debate over its size.

Economists believe that the Congress will not be able to pass the stimulus bill before the November’s presidential election. With expectations of lesser dollar liquidity in the market, the demand for the greenback has increased among investors. On the other hand, gold, stocks, and Bitcoin have started correcting lower from their local highs.

That is where Mr. Chambers sees a “malfunction.”

Conflicting Bitcoin Opinions

But not all think on the line of Mr. Chambers, at least when it comes to the US dollar and its market bias.

Stephen Roach, the former chairman of Morgan Stanley Asia, said in an op-ed that the greenback could crash by at least 35 percent by the end of 2021, citing upticks across foreign currencies and looming macroeconomic issues in the US concerning lower savings and–again–the Fed’s expansionary policies.

“In short, the vice is tightening on a still-overvalued dollar,” Mr. Roach wrote.

The bearish dollar analogy points to more demand for Bitcoin and gold in the coming sessions. Some expect the cryptocurrency would hit $20,000 should the greenback keep falling.



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3 things traders are saying about Bitcoin and the state of the bull market

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Bitcoin’s (BTC) dip below $29,000 on June 22 rocked the markets a handful of analysts to call for a potential drop below $20,000. 

Many traders on crypto Twitter were focused on the formation of a death cross on the Bitcoin chart as an omen for another potential drop in the price but analysts with a more contrarian point of view look at this chart pattern as a signal that it is time to buy the dip. 

Three reasons why some traders still see a bull case for Bitcoin include the appearance of the “spring” stage of the Wyckoff accumulation model, steady buying by long-term holders and the formation of a bear trap at the golden ratio that is similar to moves seen during previous bull runs.

The Wyckoff model says spring has arrived

The Wyckoff accumulation model has been all the rage amongst cryptocurrency analysts over the past month as the price action for Bitcoin has been tracking the pattern relatively closely since the May 19 sell-off.

As seen in the tweet above, Bitcoin’s plunge below $29,000 and the subsequent recovery above $32,000 has some analysts suggesting that the “spring test” seen in phase C of the Wyckoff pattern has been fulfilled. This would indicate that the bottom is in for the current correction and now begins the choppy climb higher.

If this turns out to be true, BTC would enter phase D, also known as the “markup phase” where a new uptrend is established and “pullbacks to new support offer buying opportunities” that are often seen as opportunities to buy the dip.

Related: Bitcoin drops below $36K as century-old financial model predicts big BTC crash

In phase D a breakout to new highs is expected as the cycle completes and prepares to potentially begin again once the move higher is exhausted.

Long term holders are still bullish

Another bullish sign cited by analysts is the steady accumulation by long-term holders.

The Bitcoin long-term net holder position shows that investors actually began to reaccumulate back in late April and they began to significantly increase their activity in May as the price fell into the $30,000 to $40,000. On-chain data shows that these investors have continued to buy into the most recent dip.

This activity suggests that more experienced crypto traders are familiar with Bitcoin’s market cycles and view the current range as a good level to open long positions when fear is high and the sentiment is low. 

The biggest rewards go to those who take the risk to buy an asset amid plunging prices and sentiment, and these are the types of situations where the contrarian traders thriv.

A bear trap lurks at the golden ratio

The third scenario some analysts are focusing on suggests that the current price movements have set up a bear trap that echoes a move seen during the last cycle which involves a pullback to the 1.618 golden ratio extension level which will then be followed by a breakout to new highs.

From this perspective, the market is currently in the awareness phase of the four psychological stages of asset bubbles. After the bear trap occurs, Bitcoin will enter the mania phase where widespread media coverage attracts the attention of new market participants who then chase the price to ever-increasing heights “based on the delusion that the asset will keep going up, forever.”

Previous calls for the possibility of Bitcoin reaching a price of $200,000 by the third or fourth quarter of 2021 by veteran trader Peter Brandt, who was far from alone in predicting its value to surpass the $100,000 mark this year, would suggest that the long-expected blow-off top is yet to come.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, you should conduct your own research when making a decision.