Bitcoin Crashes! Is The New Rally Already Over

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Bitcoin Crashes! Is The New Rally Already Over?

Bitcoin and a host of other major cryptocurrencies shed more than 10% over the weekend. The sell-off was sharp, fast, and unexpected given the growing bullish sentiment we’ve seen over the past month. Bitcoin is now trading at a one-week low and market watchers are wondering if the selling is over. The selling might not be over but, based on the outlook for the cryptocurrency, I’d welcome another dip. It will be my chance to buy some more cryptocurrency.

Bitcoin Price Forecast

The weekend sell-off was for sure a surprise, it definitely wiped a chunk of value out of the market, but I wouldn’t be too concerned about it just yet. The move occurred as BTC was hitting a technical resistance level and after a substantial move higher so is most likely profit-taking than anything else. BTC is now sitting on a key support target, near $3,700 and coincident with the short-term moving average and a trend-line, so downward pressure looks halted, at least for now. A move below the EMA would be near-term bearish with a target of $3,177. A move up from here would confirm support, the new uptrend, and likely lead BTC back to $4,200 or higher.

Ethereum Price Forecast

Ethereum, the most advanced cryptocurrency in theory, was not immune to the sell-off. The token fell nearly -20% in a matter of minutes giving up more than a week of gains. The move was able to find support near $130 and above the short-term EMA so there is some hope for the bulls; the sell-off was profit-taking, the newly forming bull market is still intact. A move lower may take the token down to $128 or $120 but I don’t expect a deeper move than that. A move up would confirm support and the uptrend, my targets are $160 and $180.

Litecoin Price Forecast

Litecoin also fell nearly -20% over the weekend and is also sitting above support targets at the short-term EMA. The liter version of BTC is still in an uptrend and looks like it will move higher and probably fairly soon. The indicators are bearish so another test of support is possible, maybe as low as $40, but upward movement is expected for the short to long-term. A move up from this level would confirm support and likely take the token up to $52 and $56.

Ripple Price Forecast

Ripple shed about -16% on Sunday and is now trading at a key support level. This level is near $0.30 and the level at which a major bottom is forming. The indicators are consistent with a test of support but do not indicate a price reversal so I expect support will hold now. A move lower may test $0.28650, a break below there would be bearish. A move up would be bullish and confirm support, my target would be $.350 and $0.40.

What Happens If the Price of Bitcoin Crashes?

Bitcoin believers may disagree, but most experts are in agreement that the run-up in its prices is a bubble. The question for them is when, and not if, its price will crash. As a corollary to that question, what will be the effect of such a crash?

Will A Bitcoin Price Crash Affect The Entire Economy?

The Financial Stability Oversight Commission recently came out with a report listing challenges to financial stability, and digital currencies merited a very brief mention. According to the agency, virtual currencies have a “very limited” impact on financial stability. This is likely because the current bitcoin ecosystem is fairly small.

Learn more about Investopedia Academy’s online course Cryptocurrency for Beginners

Subprime mortgages were the last serious financial instrument to destabilize the U.S. economy. That crisis occurred due to the confluence of a complex cocktail of factors. Actors from the mainstream economy were active participants in the process. For example, subprime creditors across the United States took out faulty loans. Big multinational banks repackaged these loans into derivative instruments and sold them to investors, who propagated these sales through different parts of the economy. Collateralized debt obligations further spread the leverage contagion across the world.

At the height of the crisis, Citigroup Inc. (C) had originated an estimated $19.7 billion in subprime mortgages. Bear Stearns, an investment bank which collapsed in the aftermath of the crisis, had a “vast portfolio” of derivative instruments related to subprime mortgages.

In contrast, bitcoin is yet to overcome its renegade status within the financial services ecosystem. The increase in its prices has occurred within the confines of unregulated exchanges that are yet to pass scrutiny by regulatory agencies. Based on recent reports, the main players in these exchanges are individual investors and bots. (See also: Why Do Crytocurrencies Have Buy And Sell Walls?)

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Big banks and investment firms have largely stayed away from the bitcoin craze and their exposure to cryptocurrency markets, if any, is limited. While it is true that bitcoin-related stocks have risen in valuation, their numbers are low.

A measure of the finance industry’s caution is the relatively subdued response to CBOE futures trading even though bitcoin’s price has jumped by more than 1,800 percent over the course of this year. Even as a clearing agent for CBOE bitcoin futures, Goldman Sachs is reportedly demanding a 100% margin for bitcoin trades. (See also: Bitcoin Futures On CBOE Vs. CME: What’s The Difference?)

Instead of the subprime mortgage crisis, the bitcoin bubble’s denouement may be similar to that of the “tulip mania” that occurred in Amsterdam during the early 17th century. Prices for tulips, imported from Turkey, surged during that bubble as “cobblers, carpenters, bricklayers, and woodcutters” participated in it.

But the collapse in tulip prices had a limited effect on the overall Dutch economy because serious financiers stayed away. According to Dutch historian Nicolaas Posthumus, only casual traders participated in bidding up prices for tulips for greed and profits. In the end, it was these people who were affected when prices collapsed. Similarly, a crash in bitcoin prices will trigger a sell-off and affect a very small number of people.

What Will Happen To The Cryptocurrency Ecosystem?

Online publication Axios has come up with an estimate of $250 billion as the monetary impact of a bitcoin crash. But that estimate betrays an incorrect understanding of the utility and markets to cryptocurrencies. There is already substantial investment in blockchain, the technology underlying bitcoin. Besides this, bitcoin’s price movements suggest that it is emerging as a store of value. Cryptocurrencies are also useful as a means of exchanging value within closed ecosystems.

That said, it will be some time before their utility is realized within mainstream applications. The current rise in prices for most cryptocurrencies is mostly the result of a domino effect from bitcoin’s surge. It is quite likely that a bitcoin price crash will result in a correction in their prices as well. It is also certain that the vast majority of cryptocurrencies that populate the current listings will disappear. Only digital currencies that have defined business models and clear utility within mainstream society will survive a crash.

Bitcoin 2020: Prepare for Major Value Crashes

For bitcoin, 2020 was a year like no other. The digital currency not only recorded unprecedented gains, it single-handedly ushered a new asset class that is becoming the first real alternative to fiat currency in the modern era.

Charting Bitcoin: 2020

For all the euphoria of the past 12 months, the path forward won’t be easy, strategists warn. With bitcoin prices reaching unheard of levels, the fear of missing out is proving too strong to resist. In finance, herd mentality is rarely a viable (or even successful) long-term strategy.

That was one of the key messages Wall Street analyst and founder of DataTrek Nick Colas conveyed last week when he argued that bitcoin would see wild fluctuations over the next 12 months. In his estimation, bitcoin can conceivably trade between $6,500 and $22,000 over the course of 2020. In the process, market participants can expect several “crashes” of 40% or more.

“Bottom line: bitcoin can rally to $22,000 and still be reasonably priced, or plummet to $6,500 and also be correctly valued,” he told CNBC. “We expect to see bitcoin trade for both prices in 2020.”

Bitcoin is in the process of becoming a “great alternative currency,” says Bubba Trading strategist Todd Horwitz, but getting there will be a long and painful process. For holders of the digital currency, this means more “dramatic falls” in value.

In an interview with Bloomberg, Horwitz said: “I would think that the bitcoin price is a bit of a bubble and I think you will see some more dramatic falls. But anytime we see dramatic falls you also see dramatic rises as the buyers try to get back in.”

He added: “I do believe the cryptocurrency space is here to stay and I think it’s going to be a great alternative currency that’s going to be used.”

Major Themes for 2020

Several major themes will influence bitcoin’s price trajectory this year, chief among them being the regulatory landscape governing cryptocurrency. South Korea – arguably one of the most favorable jurisdictions for trading cryptocurrency – is in the process of implementing new regulations aimed at curtailing speculation. The strategy includes barring people from opening new crypto accounts and from trading anonymously. Top policymakers in the country have also said they are not opposed to shutting down crypto exchanges should the new regulations fail to deter speculation.

In the United States, securities regulators are carefully evaluating the burgeoning ICO market for suspicious behavior. In 2020, the Securities and Exchange Commission (SEC) shut down The Dao token for security violation. The regulator also warned against ICOs endorsed by celebrities and scams that use the crowdraise model to lure investors. In response, the SEC has created a new cyber unit to police ICOs and bring them to justice, where necessary.

Evolving regulations and uncertainty about the future have placed considerable strain on the crypto market. In September, China issues a blanket ban on crypto exchanges and ICOs, triggering a massive correction. Other nations are still feeling their way through the asset class, with the likes of Russia and Kazakhstan calling for state-backed cryptocurrencies.

In addition to regulation, the debate over blockchain scalability will continue to influence investor sentiment. Disagreement over bitcoin’s existing protocol has led to multiple coin splits, including the now famous bitcoin cash fork. A few months later, bitcoin gold would also emerge following disagreements over the mining process.

The performance of altcoins will also be top of mind for investors in the new year, as many alternative cryptos begin charting their own path away from bitcoin. It should be clear by now that bitcoin no longer holds the same position it once did as the de facto king of the crypto market. Today, bitcoin accounts for less than 40% of the total market share for cryptocurrency, down from roughly 90% at the start of 2020.

Of course, there are many positive developments that are working in bitcoin’s favor, and will continue to do so throughout 2020. The launching of bitcoin futures on CBOE and CME has been heralded as a major achievement in bringing cryptocurrency to the mainstream. With Nasdaq expected to follow suit, investors will have plenty of options to bet on bitcoin using more traditional financial vehicles.

CBOE has also filed to list several bitcoin futures ETFs. If approved, the digital currency will be accessible to millions of investors through traditional retirement accounts.

Debates over bitcoin’s future are typically ideological as much as they are value-based. The general view on Wall Street is that the digital asset class as a whole is significantly overvalued, with many arguing that bitcoin has no intrinsic value and thus cannot be evaluated. Yet others, like Tyler and Cameron Winklevoss and John McAfee, believe bitcoin can still grow many factors above its current level.

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.

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