Bitcoin & Dirty Harry

February 24, 20211 Comment

A business contact recently asked me what I thought about timing the next entry into Bitcoin. Is it too late to buy Bitcoin? Will it keep going? Will it retrace? His questions inspired me to write this blog on, what is to most people, a murky subject. As I noted to my friend, I have not been trading bitcoin. My simple reasoning behind this lack of participation comes down to an old-fashioned investment philosophy: Only trade what you understand.

Today’s blog is my attempt to try and understand the world of bitcoin, and how one might view the current trading risks and opportunities in the space. I will, of course, take a Technical Analysis view on the subject. As a caveat: for whatever insight you might glean from this blog, please understand that I remain a neophyte in understanding the world of cryptocurrencies. As such, I invite your comments to help enlighten myself and fellow readers on the subject.

To start – Wikipedia  defines Bitcoin as follows:

 

“Bitcoin (₿) is a cryptocurrency invented in 2008 by an unknown person or group of people using the name Satoshi Nakamoto. The currency began use in 2009 when its implementation was released as open-source software.
Bitcoin is a decentralized digital currency, without a central bank or single administrator, that can be sent from user to user on the peer-to-peer bitcoin network without the need for intermediaries.”

In plain English, Bitcoin can be used to buy stuff on a worldwide basis without the need of banks.  One advantage I see is that of sidestepping the rather outrageous profit spreads on currency exchanges when dealing with a bank. Not a bad idea!  The typical bank policy on currency exchange seems rather predatory, in my opinion. As an aside, one of the benefits clients of ValueTrend enjoy is a very tight currency spread on CDN/USD. We don’t use currency exchange as a profit center.

On the negative side, Bitcoin fluctuates much more than a traditional currency banknote. As such, it appears that Bitcoin’s big appeal right now is less of a currency, and more of a speculative investment. So be it. Lets take a look at the chart.

The NYSE Bitcoin Index chart below shows us a giant triangle that broke out late last year. Traditional TA suggests that volatility returns after a consolidation pattern completes. A breakout from most consolidation patterns can target a return to the former volatility extremes within the pattern to the upside (or downside if it breaks down). The width of the triangle at the left side of this chart shows us about 87% volatility. This might imply an 87% upside projection from the late 2020 breakout. Being that we’ve seen about 78% upside since the breakout point, we may be in store for another 10%-ish upside before a pullback might set in. Keep in mind that volatility targets are rough estimates – you might see more or less than the target implies. Having said that, experience has taught me that former volatility does in fact often repeat. Another 10% on top of the recent high in Bitcoin might imply 60,000 on the index.

Given the overbought status of this currency, I would not be surprised to see a significant retracement in the near future. The risk / reward ratio for entry at this moment may be skewed to the negative, despite the potential for another 10% or so. Having said that, runaway securities like Bitcoin can stay overbought for long periods of time, and vastly overshoot their technical targets. Just look at Tesla!

If you like the idea of Bitcoin, I note that there are some TSX traded Bitcoin index ETF’s put out by Purpose – but they are too new to chart. For those interested – BTCC.B for C$ version and BTCC.U for the USD version. You can also buy good old fashioned stocks that play into the Bitcoin trade. I won’t list them all, but one stock that did catch my eye was RIOT Blockchain. From a Thomson Reuters description of the company:

“Riot Blockchain Inc., formerly Bioptix, Inc., is focused on gaining exposure to the blockchain ecosystem through its cryptocurrency mining operations, internally developed businesses, joint ventures, and targeted investments in the sector. The Company primarily focuses on Bitcoin and general blockchain technology.”

In a nutshell, these guys “manufacture” Bitcoin. Not surprisingly, the stock trades in somewhat similar patterns to the currency. The chart below illustrates this. You don’t need me to add the momentum studies to understand how overbought this stock is. At $55, its a mere 500% over its 40 week/ 200 day SMA. Um, Ok.

Conclusion

My business friend will be reading this blog. To answer his question – is it too late, and when would one buy Bitcoin? Unfortunately, this trade looks a lot like most momentum plays. These vehicles can go up much higher than expected, but they can also turn down on a dime. As an old fashioned trader, my view is to avoid Bitcoin until it corrects -given the overbought conditions. But that doesn’t mean I am right. This is one of those trades that offers little to users of traditional analytics (fundamental or technical). Its all about momentum. I call these trades “Dirty Harry Trades”.  To buy into that momentum involves a bit of luck, and a quick trigger finger to get out if the trade sours. As Clint Eastwood said in his Dirty Harry movies…”Do you feel lucky?” I don’t.

 

One Comment

  • I don’t feel lucky either, so would not bet on this. People can place bets on a lot of things if they are in Las Vegas or a bookies office, or with options and futures for that matter but I don’t get bitcoin. There is no ‘substance’ behind it. More can be created and it can disappear as we have seen. If I were a retailer I would have no interest in having someone pay for my inventory with ephemera that could be worthless the next day.

    I get folks who want to speculate and gamble with their money and they are welcome to do so. Not for me. Nope, don’t feel lucky

    Reply

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