Bitcoin Bites The Dust
Well, first thing’s first, if you got in on the Bitcoin sell-off this week, congratulations! To all the anti-crypto bunch who have been calling for a reversal in the much-hyped digital currency, news of a more than 20% rout was probably a very sweet feeling. However, not as sweet as actually being in on the move. So, for those of you licking your wounds and wishing you hadn’t missed out on the correction, let’s break down what caused this and why it was a great trade.
What Caused the Move?
From a macro-perspective the major headwind for Bitcoin this week has been the relentless rise in those pesky US treasury yields. With the US government’s vaccination drive really start to clear some big numbers, there is a growing sense of optimism that the US economy will return to normal over the summer and across the rest of the year. Now, you’re probably wondering why this is bad news for Bitcoin?
Ok, so, Bitcoin has been on a rampant rally over recent months. With the Fed committed to ultra-loose monetary policy and with the US economy in the toilet, traders have been flooding into the cryptocurrency as a way of benefiting from depressed US rate and inflation expectations. This has been boosted by the simultaneous rally in equities which have benefited from the massive wave of central bank easing.
Now, with vaccine optimism kicking up over recent weeks, inflation expectations have started to increase. Traders are sensing that the economy is going to undergo a burst of recovery once restrictions ease. This view has been boosted recently by the uptick in US data which has been surprising to the upside causing US treasury yields to explode recently.
So, Bitcoin started the week under pressure as traders started squaring positions on rising expectations that the Fed might start to move out of its easing cycle sooner than expected. Now, this bearish sentiment was added to midweek when Microsoft founder Bill Gates said that Bitcoin was not for him and warned against people investing in Bitcoin if they didn’t have as much money as Elon Musk (sorry, who?). These comments are quite pointed in the wake Bitcoin seeing an almost 50% jump on news that Tesla had bought $1.5 billion of the currency. So, that was it for Bitcoin. Risk sentiment weakening amidst rising US inflation expectations, position squaring by those holding longs and finally, Bill Gates offering his two cents.
Now, on the technical front, looking at the chart you can see that we had pretty strong bearish divergence on that last move higher. So whenever, a market is in a bull trend and we start to see bearish divergence this is a tell-tale warning sign that price is at risk of correcting lower. So again, if you got in on the 23% drop this week, nice trading and, if you missed out… better luck next time! Now, in terms of where Bitcoin is heading next. The key thing to note is that the market remains in a strong bull trend and for now, the sell off is just a correction. While price holds above the 42650 level and the rising trend line, the trend remains in tact. If price breaks below the rising trend line, the next stop is the support at 28860.
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