Bitcoin Investors Face More Pain On Likely 35% Plunge

(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)

It seems Bitcoin is melting faster than the Arctic ice cap.

The cryptocurrency already has dropped by roughly 56 percent from its peak of $20,000 per unit since the middle of December, inflicting huge losses on investors expecting it to reach new records. But the bleeding may not be over with more declines likely, according to a technical analysis. Bitcoin's support price of $7,700 was tested briefly early on Friday, a worrisome development, before rallying to $8,600 early in the afternoon. If Bitcoin falls again and breaks that support level, which is now more likely, the cryptocurrency could plunge another 35 percent to roughly $5,650.

An Investopedia article on December 27 pointed out the weakness emerging in Bitcoin, and how a 50 percent decline was imminent for the cryptocurrency. The bubble to this point has almost wholly collapsed, similar to the most famous inflated bubble of all: Tulipmania of the 1630's, Bitcoin-mania may have the same ignomious ending if the currency fails to stabilize and then rebound, which appears unlikely but not out of the realm of possibility.

Sharp Declines

The chart below highlights the sharp decline since peaking at nearly $20,000 on December 17, and how far Bitcoin has fallen in the past seven weeks, a startlingly brief period. Since breaking support of $11,800, Bitcoin has drifted down. That trend is likely to be lower unless it can somehow reverse its decline and break through its current resistance level of $11,800.

More Pain To Come

There is one indicator that the currency could bottom soon rather than proceed on a sustained decline. One can see on the daily chart that despite the steep decline, the relative strength index (RSI) has still not flashed oversold conditions, with a reading at 31. The reading is considered to indicate an asset is oversold when it falls below 30, and is overbought when the reading above 70. We can see in the chart Bitcoin peaked with an RSI of nearly 95. That means it will take a reading well below 30 to signal Bitcoin has become oversold. 

Other data, however, offer a much more sobering view. Bitcoin volume has failed to surge to the same levels seen during its meteoric ascent. That suggests that the market has yet to see a moment of capitulation. Until volume surges to near record levels, it seems a bottom has not been put into place. 

Fundamental Flaw

With hardly any way to value bitcoin on a fundamental basis, it seems the market does not have a way to determine a floor, a benchmark where investors could conclude when Bitcoin has become cheap. This may be one of the major flaws in measuring the currency, leading to both dizzying gains and declines. 

That leaves many investors solely dependant on the technical charts as a way to determine the future direction of the price. And at the moment, those charts paint a grim picture.

Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance. 

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