There is little doubt that bitcoin prices have been a bit frothy, with the NYSE Bitcoin Index (NYXBT) rising more than 890% since the start of the year. Over the past several months, the cryptocurrency and its blockchain technology have drawn positive feedback from the traditional banking sector, which sparked hopes that the currency might go mainstream. This was validated to some extent when the Nasdaq​ announced plans to launch bitcoin futures contracts next year.

The steep fall in bitcoin prices could be a "sell-the-news" response to the Nasdaq's move to add bitcoin futures contracts to its offerings next year. In addition, there are some concerns that bitcoin futures could make it easier to short sell the cryptocurrency. Short selling can help make markets more efficient by enabling traders and investors to bet against overvalued assets, which could add downward pressure to the asset. (See also: TradeStation Already Seeing Demand for Bitcoin Futures.)

Technical chart showing the performance of the NYSE Bitcoin Index (NYXBT)

From a technical standpoint, bitcoin broke out from R2 resistance at $7,825.86 and trendline resistance at around $8,500 in recent weeks. The relative strength index (RSI) moved deep into overbought territory before retreating to 63.29 after Thursday's move lower. Meanwhile, the moving average convergence divergence (MACD) remains in a bullish uptrend that dates back to October, when it began to regain its momentum.

Traders should watch for a potential breakdown below trendline support at $9,000 to R2 support at $7,825.86 or R1 support at $7,104. A further breakdown from these levels could lead to a move down to trendline support and the 50-day moving average at $6,187.68. A rebound from the trendline support levels at around $9,000 could lead to a retest of prior highs and ultimately more upside over the coming weeks. (For more, see: Bitcoin Price Crashes; Other Cryptocurrencies Follow.)

Chart courtesy of The author holds no position in the securities mentioned except through passively managed index funds.

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