Why Bitcoin Retracing Last Year's Bear Market May Plunge Further

Technical indicators suggest that cryptocurrency Bitcoin, whose recent price is more than 30% off its 2019 high in July, may fall yet more. “The best way to describe the market is it’s retracing last year’s bear market,” Mike McGlone, an analyst with Bloomberg Intelligence, indicated in a Bloomberg report. “It’s in no hurry to take out the old highs--there’s a hangover of residual selling from the parabolic rally in 2017. There’s just a lot of people who bought it, got way too overextended, who will be responsive sellers,” he added.

Among digital assets, Bitcoin is the most widely-held and widely-watched, as well as the largest by market value at about $155 billion. The trading range between its 50- and 200-day moving averages is now narrower than any previous time since June. Moreover, Bitcoin's current price fell further as of mid-day Thursday, is below its 50-day moving average, and an additional drop below its 200-day average may represent a sell signal.

Significance for Investors

Bitcoin's price collapsed from a high of $20,000 in Dec. 2017 to a low of about $3,200 almost exactly a year later, for an 84% plunge. In 2019, it rebounded to nearly $12,600 in early July before before pulling back to $7,400 in late October.

After Chinese President Xi Jinping encouraged his country to "seize the opportunity" in blockchain technology, Bitcoin's price surged by 35% on Oct. 25, to about $10,000. However, government-controlled newspaper People's Daily warned that encouraging technical developments in blockchain does not mean promoting speculation in digital currencies, which the Chinese government opposes. Bitcoin traded in a range between $8,600 and $8,700 on Nov. 14.

Meanwhile, two professors, from the University of Texas and Ohio State University, found that Bitcoin's 2017 surge probably resulted from manipulation. “Our results suggest instead of thousands of investors moving the price of Bitcoin, it’s just one large one,” Professor Griffin of the University of Texas stated in a interview for another Bloomberg article. “Years from now, people will be surprised to learn investors handed over billions to people they didn’t know and who faced little oversight," he added.

The two professors looked at activity in Tether, a digital token that is supposed to maintain a $1 value, and on cryptocurrency exchange Bitfinex, an entity with the same owners and managers. "This one large player or entity either exhibited clairvoyant market timing or exerted an extremely large price impact on Bitcoin that is not observed in aggregate flows from other smaller traders," they concluded.

Officials at Tether and Bitfinex deny these claims. However, they are under U.S. federal investigations, for alleged misappropriation of client and corporate funds, and for alleged manipulation of Bitcoin. Panama-based payment processing firm Crypto Capital, used by Bitfinex, is under investigation for alleged laundering of proceeds from illegal drugs.

Looking Ahead

Despite these cautionary tales, investors are finding new ways to profit off Bitcoin swings. Trading in derivatives linked to Bitcoin is a new, and rapidly growing, area for speculators, with daily transactions valued between $5 billion and $10 billion, about 10 times to 18 times the figure for Bitcoin spot trading, per a third Bloomberg report. “That’s where the money is to be made in crypto,” as Sid Shekhar, co-founder of London-based data provider TokenAnalyst, told Bloomberg. “It’s the biggest casino ever,” he added.