Does Recent Bitcoin Strength Portend a Bull Market Revival or Bull Trap Reversal?

Benjamin A. Smith
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With the resurgence in Bitcoin (CURRENCY:BTC) from devastating peak-to-trough lows which saw BTC fall over ↓67% from December 18 – April 9, investors are wondering whether it’s safe to dive back in. This ongoing two week rally—which has seen prices bounce back by ↑37%—has once again encouraged the so-called “experts” to plaster 6-digit price targets all over Twitter. With the pumping more voracious than ever, we examine whether the bulls will be proven right again, or whether thousands of investors will get caught in a nasty bull trap of epic proportions.

The bullish case for bitcoin is being bolstered almost exclusive by recent price action. As mentioned, bitcoin has rebounded ↑37% from a low of $6,535/BTC on April 9, to $8,961/BTC at present. In fact, the move has been so robust that bitcoin has both tested and pierced its simple 50-Day MA at around the $8,800 mark.

Despite the move, there hasn’t been a defining piece of news responsible for such a rebound—at least nothing which stands out in the volume profile. The exception could be the April 8 news that elite financial moguls such as George Soros, the Rothschild family, and others, had set their sights on bitcoin. Even after this important disclosure however, BTC didn’t react right away. Trading volume run rate has been quite anemic during this entire 2-week rally, only approaching average levels on April 12—a full four days after the announcement. If Sorothfeller (Soros Group, Rothschild family, Rockefeller family) interest was causation for the rally, its intentions were stealthily hidden.

Overall, the rally has almost exclusively been driven by the low volume “melt-up” commonly seen in major U.S. stock markets the last few years. That modus operandi was simple to understand in retrospect: steady stock buyback purchases, record ETF inflows, and short volatility suppression triggered an incessant march forward in equity prices. Although periodic days of heavy selling and index price degradation were intermingled in the melt-up, nothing lasted more than a few sessions.

Right now, bitcoin appears to be trending a similar pre-January 2018 trajectory as U.S. equities. That is, drip buying is allowing bitcoin to “melt-up” while sellers go on hiatus. Volatility continues to trend lower from the January “Bitcoin $20,000” peak, sapping the bears of repressive energy.

Perhaps more importantly, the news cycle has flipped in bitcoin’s favor. There appear to be less stories about sovereign nations banning bitcoin and more stories about institutional acceptance and adoption—anecdotally speaking anyway. For example, International Monetary Fund chief Christine Lagarde dedicated two blog posts on the official IMF website to cryptocurrencies in mid-April. The last of which, Lagarde touted the multiple benefits of crypto and envisaged a macro shift away from government-issued fiat towards cryptocurrencies. That’s game-changing news from the highest echelons of world finance.

Christine Lagarde’s gambit and similar evocations have undoubtedly helped bulls dig out from deeply oversold conditions. But looking beneath the hood, is the optimism warranted?

While we would love to ride the wave of another bull market, something doesn’t seem right this time.

3 Charts Which Should Give Bitcoin Investors Pause

With all the momentum clearly as bitcoin’s back, we’re going to throw the proverbial turd in the punchbowl. Again, we would love to be proven wrong here and ride another wave up. We’re huge believers in the blockchain as a transformational force in today’s economy, and crypto undoubtedly retains ideal currency-like qualities.

But looking at the entire picture, something doesn’t add up. The following three charts are certainly not datapoints once expects to see in any asset bull market, regardless of type.

This chart is easy to understand from a logical perspective. Since BTC crashed in December 2017, the number of BTC transactions have cratered, down to 2-year lows. Of course, the bearish price sentiment was bound to have spillover effect in the retail market. There’s likely a “wealth effect” scenario at play here, where investors decide to hold on to bitcoin while its value is suppressed as opposed to spending it. Fair enough.

But still, when transaction volume can get halved to such an extent, can bitcoin really be considered a legitimate currency? Wasn’t the projection than bitcoin would be used by over 400 million people worldwide by 2030 the basis for the massive price predictions we saw in 2017? Why should bitcoin sell at exorbitant sums of money if millions upon millions of people fail to use it regularly in real-world monetary applications?

If we go further back on the chart, transaction volume continued to tend upwards in previous bitcoin bear markets. This is the first one to brake that trend in a clear and defined way. I’m failing to glean any bullish offtake from this fact.

If capitulation selling is the hallmark of any bubble bottom, can we say it’s really happened here? This is the type of panic selling defined by extremely high volume and sharp declines; an indication investors have thrown in the towel and given up. Remember, bitcoin wasn’t some garden variety bubble with some obvious end-conclusion. This is the biggest bubble world has ever known, where polarizing opinions on true asset worth vary from person to person.

Given these facts, it seems rather unlikely bitcoin would simply reverse without a gigantic investor washout. While some may argue the February lows could constitute “capitulation selling”, I would beg to differ. There’s nothing overtly spectacular about it, outside of February 6, which experienced a 2-year volume spike high. That occasion was not the all-time high in BTC volume traded; that honor dates back to November 2, 2015, when bitcoin was just beginning to surge out of its 18-month long bubble/consolidation phase #2.

This chart is about 2-weeks old, but its application is still relevant. In essence, bitcoin is due to for a substantial move in volatility, given historical patterns.

Of course, it’s certainly possible the bull market resumes and volatility shoots higher as prices get frothy again. But at this stage, how likely is that scenario? Are we to believe investors will put the recent past behind them and bid BTC up in earnest?

The bulls will argue “yes”. They’ll say bitcoin has done this repeatedly in the past, making the naysayers eat their words. And you know what—they’re right.

But that was before the Chicago Mercantile Exchange started trading bitcoin futures products. Savvy observers understand that the all-time high in BTC prices just happen to coincide with the opening of BTC futures on the CME. This underestimated dynamic has virtually gone unnoticed by BTC investors, as far as I can tell. But it hasn’t eluded everyone.

Perhaps the real question investors should be asking is whether bitcoin will be subject to the same manipulation and price suppression games now that derivative trading is afoot. This was the common denominator not present before. Precious metals investors will know exactly what we’re taking about.

Blockchain Power Trust Executive Chairman Ravi Sood says bitcoin “has the potential to go dramatically higher” than $100,000 per unit. He talks to James about how the company will become leaders in the cryptocurrency sector due to their scale and low operating costs.

Benjamin A. Smith

Benjamin A. Smith

Ben is a research analyst and capital markets professional with nearly 20 years of experience. His areas of expertise are broad-based, and include extensive knowledge of macro economics, stock/derivative trading, commodity complexes, cryptocurrencies and technical/quant analysis. He also maintains an particular affinity for U.S. politics and the macro-regulatory environment facing...
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