Is Bitcoin a Bargain Now?
Today, Bitcoin is trading at only a fraction of the record-high in December 2017. Have you bought Bitcoins on the 16th December when a single coin traded at around $20,000, you would have lost around two-thirds of your investment by today. Even if you were a buyer just a month ago in early May, the price knows for only one direction since then – down.
This is not to say that Bitcoin and other cryptocurrencies have forever gone, as their opponents would suggest. In the end, one of the most popular sayings in the investment world is “buy low, sell high”, and you could indeed buy Bitcoins at a relatively low price these days.
With the hype and headlines that Bitcoin received in the previous months, there are still tons of potential buyers who are able to send the price up. The key is to analyze the price-action and follow crypto-related news, which have a significant impact on the crypto market. There is no doubt that blockchain – the underlying technology behind Bitcoin and many other cryptocurrencies – has tangible benefits by making something that is digital in nature impossible to copy. Even Google and JPMorgan have recognized this. Jamie Dimon, JP Morgan’s chief executive, said that he “regrets calling bitcoin a fraud”, and now believes that “blockchain is real”.
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Regulation: The Dark Clouds Above Bitcoin
New laws that try to regulate the quite unregulated crypto market are in the pipelines in many countries. Even the slightest hint and rumor of a new regulation can send shockwaves through the market and put pressure on the price of bitcoin, which is something that potential investors need to be aware of.
When Bitcoin futures were introduced in the final quarter of 2017 on the CME Group and Cboe Global Markets in the US, the possibility to short-sell bitcoin put additional downward pressure on the coin and increased liquidity.
South Korea’s plan to ban bitcoin trading also had a negative effect on the market in early 2018. The South Korean Finance Minister, Kim Dong-yeon, said that “there are no disagreements over regulating speculation”, and that the country may impose restrictions on anonymous trading accounts for tax purposes. Even as South Korea didn’t ban crypto trading in the end, there are still dark clouds over the market and other countries may indeed restrict or ban crypto trading altogether.
If you’re thinking about buying bitcoins now, bear in mind that headlines about potential regulations and restrictions on crypto trading could send bitcoin’s price down in a matter of hours. And as the price of other cryptocurrencies closely follow that of bitcoin, you won’t be able to hide in altcoins after a bear market begins.
Is Bitcoin in a Bubble?
Many famous investors called bitcoin a bubble and compared it to the famous tulip mania in the Netherlands in the 17th century. Warren Buffett, the famous executive of Berkshire Hathaway and billionaire investor, said he has no plans to invest in the crypto market. “In terms of cryptocurrencies, generally, I can say with almost certainty that they will come to a bad ending,” he said. “When it happens or how or anything else, I don’t know.”
Even if you don’t like to follow investment advices and want to trade on your own, a look on the following chart shows an obvious similarity between the price-action of bitcoin and the general stages of a market bubble.
According to this chart, bitcoin is currently in the “Capitulation” stage and not very far from “Despair”. Still, note that bitcoin is designed to resemble the supply and demand dynamics of gold, and once all bitcoins are mined there will be no additional supply of the coin. Combined with the potential of blockchain technology, the slowing supply could show to be beneficial for the price of the cryptocurrency, given that there are enough interested buyers to jump into the market.
Protect Against Bitcoin’s Volatility
Cryptocurrencies are among the most volatile asset-classes available to investors. While volatility is necessary to create trading opportunities and make a profit, it can also work against you if you’re an unexperienced investor.
To protect against potential losses caused by volatility, don’t trade bitcoins on leverage if you’re new to the crypto market. Trading on leverage increases your position size in order to magnify your profits, while dedicating only a small amount of your trading account as the collateral for the trade (known as “margin”). This works well in liquid and less volatile markets such as Forex or blue chip stocks, but may go easily against you in the very volatile crypto market.
Bitcoin can easily fluctuate a few thousand dollars in a single day, and magnifying this price-move with leverage is a sure way to blow your account. Instead, trade bitcoin without leverage until you get the necessary experience. After that, you can try to increase your leverage slightly and see what kind of impact it has on your trading performance.
In addition, use stop-loss orders to protect your trading capital from large losses. A stop-loss order will automatically close your position once the price reaches a predetermined level.
Buy and “Hodl” Bitcoins
The usual investor would look to buy and hold (or “hodl”, in crypto-jargon) his bitcoins until the price rises. While this would have worked well previously when bitcoin knew only for an uptrend, investors may be able to reap more profits by adopting an active trading approach nowadays.
If you don’t have the time to actively manage your trades and want to follow a set-and-forget approach, then pay attention to the following pointers which can help you make the most out of your investment:
- Always invest how much you’re willing to lose. Bitcoin is still a relatively new currency with a high volatility, and the first rule of investing is never to invest more than you’re able to lose. Don’t place your life savings into bitcoin.
- Move the bitcoins into your personal wallet. If you have the funds, buy a hardware wallet to store your bitcoins which a safer alternative to a software wallet. Don’t leave your bitcoins at the exchange.
Follow the major developments in the crypto-world. Even if you’re not an active investor, you need to be up-to-date about the most important events around cryptocurrencies. This way, you can adjust your portfolio monthly, quarterly or even yearly.
Trading Bitcoins: Here’s What You Need to Know
Trading Bitcoins is quite different to a buy-and-hold strategy. Traders need to actively follow the market and determine the best times to open and close their positions. Most traders have a shorter-term view on performance and the market compared to investors. The current market environment of bitcoin and cryptocurrencies in general makes trading a more rewarding approach than buying and holding bitcoins.
Given the supply and demand dynamics of cryptocurrencies, traders need to pay close attention to technical levels which host a large number of buy or sell orders (support & resistance zones), and utilize other tools of technical analysis to find the perfect entry and exit points.
Fundamental factors play also an important role and short-term bitcoin trading. Are there any changes to existing regulations that cover crypto-trading? Is there a fork or hard-fork in sight? Are there any new major players who adopted blockchain or are developing blockchain-based products? All these events can have a significant impact on the value of bitcoins and should be followed closely by traders.
To determine whether it’s a good time to buy a bitcoin now, let’s take a look at the technical picture of bitcoin. Given the nature of cryptocurrencies and the lack of typical fundamental models, technical analysis has shown to have a remarkable track-record of predicting future price-moves of bitcoin.
The Technical Picture of Bitcoin in June 2018
Bitcoin has traded between $100 and $1,000 for a long period of time and started to see a sharp increase in popularity (and price) in 2017. That’s why most of our analysis will be based from 2017 onwards. In the end, we’ll have a clear answer on “Should I buy bitcoin now & is it a good investment” from a technical standpoint. The following chart shows the weekly chart of bitcoin with Fibonacci retracements applied to it.
Fibonacci retracements measure the extent of a price correction from a swing-low to a swing-high, and traders can expect a large number of orders placed at Fibonacci retracement zones. According to the famous Dow theory, a correction should reach around 50% of the initial move before reversing and picking up the previous direction again. If the price fails to respect this rule, the correction could actually be a lasting downtrend. As the chart above shows, the price fluctuated around the 50% Fib retracement only to continue lower and come close to the 78.6% Fib retracement. This could be a sign of a longer-lasting downtrend instead of a correction of the previous uptrend.
The chart above shows the daily time frame with horizontal support zones below the current price. In case the important support at $6,000 breaks, the price could fall to the next support zones located at $5,000 and $3,000. Buyers could perceive those levels as good entry points for a buy order.
Peak and Trough Analysis of Bitcoin
The peak and trough analysis remains one of the most effective ways to analyze the financial markets, and can easily be applied to the crypto-market as well. All trends consist of higher highs and higher lows in case of uptrends, and lower highs and lower lows in case of downtrends. If one of those trend characteristics is absent, there is a high probability that the price will reverse. The following chart shows important HHs, HLs, LHs, and LLs on bitcoin.
The downtrend that started when the cryptocurrency reached its record-high in December 2017 failed to make fresh lower lows in the previous two attempts. This shows an exhaustion of the downtrend, and the possibility of a new uptrend. The descending triangle formation shown by the red lines also signals a potential continuation of the previous uptrend. However, we would need to say a break of the upper triangle line as a buy confirmation, which is around the $8,500 mark.
The Relative Strength Index, which was extremely overbought in December and could have been used to predict the upcoming crash, now shows an oversold market condition which adds to the possibility of an up-move. However, as long as the market doesn’t form a fresh higher high, an overall bearish picture remains.
Should I Buy a Bitcoin Now & Is It a Good Investment?
Fundamentally, bitcoin faces big challenges in terms of new regulations and potential trading restrictions in some countries. While these situations haven’t materialized yet, you need to be aware that even the slightest hints of restrictions and banning of crypto-exchanges can have a large impact on the price of bitcoin.
While developments on the fundamental side are still uncertain, technicals show a clearer picture. A break of the important support zone below $6,000 shows $5,000 and $3,000 as the next price-targets. This would also lead to the formation of a fresh lower low, validating the downtrend. On the other hand, a break of the upper triangle line could send the price upwards to $10,000 and $12,000. While this coincides with the RSI in oversold levels, be aware that oscillators can remain at extreme levels for an extended period of time. Right now, patience is the key as we await bitcoin’s breakout either to the upper or lower side.