Bitcoin Meltdown Likely To Continue
Bitcoin (BTC-USD) has been drifting aimlessly for months now, as the digital asset has been in a relatively wide trading range bouncing between $6,500 and $10,000. Overall, things just aren’t that great for Bitcoin these days, a stark difference from the frantic highs seen late last year. Essentially, Bitcoin has lost its mojo, and popularity in the world’s best known digital currency has taken a serious dent in the process. Google (GOOG) (GOOGL), Facebook (FB), Twitter (TWTR), and other major platforms have banned Bitcoin advertising, governments have cracked down on it, and to complicate matters the “Bitcoin Bandits” are back.
Security breaches and Bitcoin thefts are nothing new in the wild west world of cryptocurrencies. But the most recent casualty, a major South Korean exchange Coinrail, which just got hit for over $35 million in digital coins is a particularly problematic setback. Bitcoin and the entire cryptocurrency complex for that matter are treading on very thin ice these days. In the absence of significant bullish catalysts sentiment is key in the Bitcoin kingdom, and with another major security breach, loss of confidence can materialize and seriously damage the already fragile sentiment in Bitcoin and other digital assets.
In addition, after the attack Bitcoin has dropped by about 15% and is now trading below $6,500, which is right around the April low. In fact, Bitcoin is essentially flirting with a triple bottom as the prior low (intraday) was in February at around $5,900. Right now, this is a very crucial time for Bitcoin prices, as the digital currency can either form a lasting triple bottom low, or it can fall through this significant support level and possibly drift a lot lower.
Bitcoin Criminals Strike Again
Coinrail, a major South Korean Bitcoin exchange got hit by cyber criminals over the weekend, who in the process made off with roughly $37 million in someone else’s Bitcoin (and other cryptocurrencies). Incredibly, the cyber bandits stole roughly 30% of all coins traded on the exchange. Bitcoin dropped sharply on the news, giving up more than 10% of its value almost immediately.
This is very bad for two primary reasons. One, people lost more than $37 million worth of digital coins which smashes confidence and damages the already fragile sentiment surrounding the crypto markets. And two, this exposes just how weak the exchange industry is in some places.
South Korea is one of the biggest and most important markets for Bitcoin trading, and the government there has already expressed concern about the loosely regulated industry several times. In fact, government officials have gone as far as to suggest the shutdown of domestic exchanges. The prospects of domestic exchange shutdowns in SK could be disastrous for Bitcoin in the short to intermediate term. So, with another serious security breach, one must wonder whether the South Korean government may begin to implement more draconian measures against the domestic Bitcoin industry.
These developments are particularly troubling because Bitcoin has so few if any positive developments or catalysts occurring on its side right now. In the absence of positive news flow sentiment can easily become overly negative, and that has the potential to push Bitcoin’s price a lot lower.
There is Some Good News
Blockchain Wallets Continue to Increase
Blockchain wallets continue to be created, which suggests that the cryptocurrency network continues to expand, albeit at a slower pace than throughout last year. There are over 25 million blockchain accounts now, which is about a 73% increase YoY.
The Lightning Network
The LN promises to solve scale and cost issues not only for Bitcoin but for many other popular cryptocurrencies. The LN will allow for every day transactions to occur swiftly and at nearly zero cost. The test results of the beta version are starting to come in, yet much more work needs to be done before the LN can hit the mainstream in a user friendly, efficient, practical form. The LN should be a significant catalyst for Bitcoin prices in the future, however, we may be some time away from a real, mainstream type breakthrough version of the network.
Major Bitcoin ETF
Possibly the most significant short to intermediate term catalyst for Bitcoin prices is the possibility of the introduction of a major Bitcoin ETF. Yes, there is the Grayscale Bitcoin Investment Trust (OTCQX:GBTC) but it doesn’t trade on a major exchange and GBTC trades at an enormous premium (typically 50-80%) to Bitcoin. An introduction of a Bitcoin or a cryptocurrency ETF, or even better several ETFs would do wonders for the cryptocurrency industry in general.
First, it would further legitimize the digital asset world and would suggest that the industry does have a lasting future in the world of finance. Second, it would draw in institutional investors on a very large scale. Third, it would provide enhanced trading instruments for retail and institutional investors and would presumably take the premium out of GBTC and other Bitcoin trading vehicles. Fourth, it would enable significant amounts of capital to come in to the market and would likely elevate prices to a whole new level.
Sentiment in Bitcoin is relatively poor right now, and the latest breach has damaged confidence even more. Sentiment drives price action in Bitcoin and since sentiment is negative, and there are no substantial positive developments to speak of right now technicals take over.
Is there such a thing as a triple bottom? The short answer is sometimes. However, in this case Bitcoin might find it difficult to stay above $6K. Bitcoin, right now, is essentially on the verge of drifting a lot lower.
First it’s important to point out that the February low was a clear intraday trading low and the price did not close anywhere near $6K, in fact much closer to $7K was the closing low. Second, we can see a series of lower highs, and we can even look at the April low as a lower low due to a lower closing price. In addition, if Bitcoin closed around its current level or lower it could be perceived as another marginal lower low. So, the overall technical image looks quite bearish right now.
BTC 1-Year Chart
In addition, there has not been a period of capitulation, extreme pessimism, retail investors throwing in the towel, panic, etc. This is something you would expect in a major bottom given the enormous and unprecedented surge late last year. It’s unlikely that the ultimate bottom will be achieved without extreme bloodshed and carnage. Therefore, I am not convinced we are there yet, and I expect Bitcoin to go lower before the real bottom is reached.
The Bottom Line
Bitcoin’s popularity has waned over past months, sentiment has diminished, and confidence has been badly damaged. The most recent cyber-attack has opened the door to new questions about security, and possible detrimental government regulation. Moreover, the positive factors are either weak or nonexistent right now. Therefore, sentiment continues to turn more bearish. And since sentiment drives prices in Bitcoin technicals become overly important, and quite frankly the technical image looks bearish as well.
Bitcoin is on the verge of melting through a triple bottom, and a panic type capitulation bottom has not occurred yet. Effectively, Bitcoin could go much lower if the current support of $6-6.5K does not hold. I expect prices to bottom out in a capitulation type panic selling bottom sometime this year.
Long-term I am a believer in Bitcoin, and I think Bitcoin and other major coins will be worth many times what they are worth now. Essentially, I believe that peer to peer payment systems are the future and ultimately could account for large portions of the real economy. This is why I continue to hold relatively modest positions in some of my favorite coins despite my short-term bearish outlook. Ultimately, I plan to buy more when the real bottom occurs.
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Disclaimer: This article expresses solely my opinions, is produced for informational purposes only, and is not a recommendation to buy or sell any securities. Investing comes with risk to loss of principal. Please always conduct your own research and consider your investment decisions very carefully.
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Disclosure: I am/we are long BTC-USD, XRP-USD, BCH-USD.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.