Chart Of The Day: As It Tumbles, There's Reason To Grow More Bullish On Bitcoin

After spending the weekend trading above the $40,000 level, Bitcoin is lower today, at time of writing around $35.1K. That's a drop of almost 14% in one day, a loss of almost 18% over the past two days.

This steep tumble has generated such headlines as “Two-Day Bitcoin Plunge Shakes Faith in Cryptocurrency Boom” and “Bitcoin's Wild Weekends Turn Efficient Market Theory Inside Out.” We can't vouch for shifting investor sentiment on the digital asset, nor do we have any idea what the cryptocurrency could be worth a year from now. But we do know it's becoming increasingly more closely watched.

JP Morgan might be correct in their call that the token will surge to $146,000 in the long-term, competing with gold as an 'alternative' currency. On the other hand, as Bank of America asserts this Bitcoin rally may just be the “mother of all bubbles.”

From the outset we've been uneasy with the entire concept of digital currency. However, it appears that this market disregards physical value. So Airbnb (NASDAQ:ABNB), which has no physical real estate holdings, was worth more than the three largest hotel operators after its IPO, albeit without assets. Even though it’s just a website that gets booking commissions.

And electric carmaker Tesla (NASDAQ:TSLA) has a market cap that's higher than the seven largest conventional carmakers combined, though it’s expected to sell fewer than 1% of total global vehicles. Similarly, Bitcoin is worth over $34,000, after a decline that has triggered some panic, while physical gold costs $1,847.

Still, though we're bemused by any asset that doesn't have a physical component, we won’t fight the trend. And since we’re going with the trend, it's clearly up. After Bitcoin's value doubled in three weeks, why would anyone be surprised by profit-taking? Plus, Bitcoin has always had a history of volatile price swings. After all, only a few weeks ago it was valued at $20,000 and that seemed breathtaking at the time.

Of course, a very large move lower could scare investors into a stampede. But our perspective has been, when everyone was gung ho about Bitcoin, we were suspicious of complacency. So, now that panic-inducing headlines are scaring the crowd, we feel more comfortable assuming a managed risk in favor of the cryptocurrency.

Here's what the balance of supply and demand currently looks like:

Bitcoin has been continuously accelerating the pace of its advance. So now, falling is not a bad thing.

Indeed, Bitcoin enthusiasts should want the cryptocurrency to decline, so that anyone who wants to cash out can do so and allow others to pick up the mantle.

It’s more dangerous when an asset spikes up, because the more it gains the greater the hazard of a correction, as more people attempt to lock in profits.

Although we don’t tend to use Fibonacci retracements, we found it noteworthy that the price found support at 0.382, the minimum retracement level.

Note, the 50 DMA is moving up toward the current rising trend line, while the 100 DMA rises to support the second uptrend line, at $22,200, and finally the 200 DMA retraced the shallowest uptrend line on this chart, at $14,000.

The sharper the dip to these levels, the better the risk-reward ratio, though the price may not get that far. That’s the trade-off between risk and reward.

Trading Strategies

Conservative traders would wait for the price to create a base of support and trade off that.

Moderate traders may risk a long position if the price bounces off the uptrend line.

Aggressive traders might trade off the 0.382 Fibonacci rebound, provided they understand and accept the risks and are accordingly committed to a trade plan.

Here’s an example:

Trade Sample – Long Position Setup

• Entry: $34,700
• Stop-Loss: $33,700
• Risk: $1,000
• Target: $44,700
• Reward: $10,000
• Risk:Reward Ratio: 1:10