Bitcoin has just crashed hard – where will it go next?

Bitcoin © Chesnot/Getty Images

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Bitcoin took one hell of a beating yesterday – down around 15%.

In a day. Oof.

If the FTSE 100, the dollar or the Dow did something similar, it would go down in history.

But for bitcoin, it’s all part of the rocky ride.

Bitcoin speculators – look out below

For several months now, bitcoin has been meandering around the $10,000 mark, sometimes a little higher, sometimes a little lower. But there always seemed to be support around $9,500.

The $9,500 level gave way and whoosh, suddenly we are staring down the barrel of $8,000. Just above was the intraday low, according to Coindesk. As I write, the market has rallied and we are sitting around $8,500.

But bitcoin has a nasty habit of doing this. And speculators take note: if bitcoin restests a base several times in a sideways market, but the highs are all the while getting lower – in other words, it’s tracing out a triangular pattern – then, when the base gives way, capitulation follows.

It did it back in 2018. While each high was lower than the last, just below $6,000 was the base, holding on each re-test. But eventually the base gave way and, before you know it, bitcoin was near $3,000.

It’s done the same thing over the course of the summer, though on a much smaller scale.

There should be some support around $7,500, then some more at $6,000. But I would not be too surprised to see $5,000.

But it’s bitcoin, so it could just as easily take off from here and go to $100,000.

Credit where credit’s due. The guys over at ByteTree, the blockchain data analysis engine, saw this coming back on 6 September, with bitcoin trading at $10,800,

James Bennett declared in the ByteTree blog that bitcoin was trading at a 35% premium to fair value, saying: “We anticipate a sharp fall in bitcoin’s fair value in the coming weeks unless weekly and monthly transaction volumes reverse the current downtrend. At the present time, the market value is $10.8k with a fair value just under $8k, marking a 35% premium.”

I’m a shareholder in ByteTree so I’m delighted their system is working. It calculates fair value for bitcoin based on its utility as a payment network. It looks at the ratio between the value of the network and the transactions, saying “Fair value is a measure of the price attributable to each bitcoin, relative to its utility as a global settlement network.”

So what’s behind the crash? And where is bitcoin heading next?

Here’s one for the conspiracists. And there may even be something to it.

The crash of 2017-2018 came shortly after the Chicago Mercantile Exchange (CME) announced that it would soon be trading bitcoin futures. Sure enough, manipulation at the CME was blamed for the 83% falls from high to low that followed.

Many are attributing yesterday’s crash to the same source – the derivatives market.

On Friday the CME announced that it is preparing to offer options trades on its bitcoin futures contracts. Meanwhile, Bakkt rolled out a regulated bitcoin futures contract this week which, unlike the CME’s, is settled in actual bitcoin rather than US dollars.

Bakkt, by the way, is a bitcoin futures exchange and digital assets platform founded in 2018 by the Intercontinental Exchange (ICE), the parent company of the New York Stock Exchange (NYSE). Its futures contact has hit many delays, but it finally began trading this week with a first day volume in the monthly contract of 71BTC (around $700,000), which I imagine was a bit of a disappointment. It’s being described as a “volume fail”.

When the CME began trading its futures, bitcoin had gone parabolic. $20,000 was hit. The market cap of all cryptos was close to $1trn. I find it hard to see how the CME’s daily trading volumes of below $100m brought the whole thing tumbling down, but that is what many believe.

In any case, that is where we are, and dark forces are what you face if you speculate. My take is that in 2017-2018 markets had got way ahead of themselves and needed to correct. Today they felt tired.

And it was not just bitcoin that corrected. All cryptos did. In fact, bitcoin’s 15% intraday declines look relatively sober compared to some of the alt coins. The likes of bitcoin cash, bitcoin SV and EOS were all down 25%.

If you pull back and look at the grand history of crypto, you’ll see it’s par for the course.

My short-term trend-following system issued a “sell” signal back in August. My longer-term trend-following system has not yet issued a sell. It’s saying ride out the volatility. But my long-term trend-following system can be a bit laggy on bitcoin sales – it works better on the buys.

My own opinion, for what it’s worth, is that we are going lower. The point of systems is that you obey them. You override such uninformed, inconsistent things as opinions. Otherwise, before you know it, you’ll be acting on a whim.