Bitcoin (COIN) has a had an incredible rollercoaster ride over the past year. Prices have fluctuated wildly from about $800 to nearly $20,000 per coin. However, over the last month Bitcoin has been trapped in a trading range, as the digital asset has been consolidating since hitting an all-time high in mid-December. Bitcoin attempted a breakout in recent days but was denied at a crucial resistance level, $17,000, not exactly a positive development from a technical standpoint. Moreover, several troubling fundamental elements appear to be materializing concerning Bitcoin. Thus, deteriorating technical factors, coupled with weakening underlying fundamental elements are likely to put increasing pressure on Bitcoin’s price over the short-term.
My Personal View on Bitcoin
I am a strong believer in Bitcoin and its Blockchain long-term. The decentralized aspect of Bitcoin, its popularity, and its potential multiuse function as a digital commodity, a form of global currency, as well as a digital store of value are extremely appealing from a long-term investment point of view. However, widespread adoption of Bitcoin as a credible alternative form of currency with the potential to challenge the current fiat monetary system remains far in the future.
Therefore, Bitcoin’s rise to a multitrillion dollar market cap is not going to be a smooth ride up on an elevator. There will be peaks and troughs, ups and downs, huge rallies as well as big shorts. So, while I am a believer in Bitcoin long-term and see the price going much higher in the years ahead, I cannot ignore the immediate evidence that suggests Bitcoin could fall further over the short-term.
Primary Areas of Concern
1. Loss of Technical Momentum
2. Increased Short Interest from Institutional Investors
3. Bitcoin’s Crashing Market Share
4. Bitcoin’s Continued Functionality Issues
5. Governments’ Continued Crackdown on Bitcoin
Loss of Technical Momentum
It’s essential to point out the decelerating technical momentum apparent in Bitcoin right now. The digital asset’s inability to break decisively above $17,000 is a troubling technical development. Moreover, a closer look reveals that Bitcoin appears to have put in a second shoulder on the daily chart. We can now see a clear head and shoulders pattern in the chart which appears quite bearish from a technical point of view.
Bitcoin 10-Day Chart
If Bitcoin is not able to breakout above $17,000 in the coming days, there is a good chance BTC retests the $12,000-$12,500 support level. Considering the mounting short interest in BTC and the stacking fundamental concerns facing the digital asset, the underlying support could plausibly buckle. If the $12,000-$12,500 level breaks this would nearly guarantee a retest of $10,000, and a break below $10,000 would open the possibility for a much bigger stumble.
Bitcoin 3-Month Chart
It’s important to point out that $10,000 is a key psychological level, and a break below this point is likely to incite a significant wave of selling, that could culminate in a panic washout. In such a dramatic selloff event Bitcoin’s price could fall to a support level of $5,000-$6,000. I am not suggesting Bitcoin is likely to fall to $5,000, but it is possible if prices end up falling below $10,000.
Bitcoin 1-Year Chart
Increased Short Interest from Institutional Investors
While some retail investors are taking out mortgages to buy Bitcoin, many institutional market participants are stacking up bets against the digital asset. Traditionally this trading dynamic ends badly for the little guy. Recently compiled data by the Wall St Journal shows that retail investors are 3.6 times more likely to put on bullish BTC bets, while institutional guys are 2.6 time likelier to put on short bets.
The data was compiled by analyzing Bitcoin futures positions, categorizing positions over 25 contracts as institutional investors, and classifying positions under 25 contracts as retail clients. Considering that 25 contracts equates to roughly $350,000 suggests that there are a lot of hefty futures bets of over $350,000 being placed against Bitcoin in recent weeks. Naturally, the primary reason institutional, or “smart money” investors would be wagering such large sums against BTC is if they were fairly sure the price had further to fall in the short-term.
Bitcoin’s Crashing Market Share
Bitcoin’s market share of the total cryptocurrency market has dropped drastically over the last year. One year ago, BTC’s value represented about 85% of the whole cryptocurrency market, about 1 month ago it was 60%, and now it is at an all-time low of just 33%.
This suggests that Bitcoin may be losing its luster in some areas of its proposed functionality. For instance, Ripple is taking over the financial transaction segment, Monero found its home on the dark net as the anonymous currency of choice for shady underworld dealings, and other digital assets are also fulfilling their roles.
Bitcoin is waiting for the Lightning Network to be implemented before it becomes recognized as a legitimate form of digital currency capable of mass adoption. But while it waits BTC is losing market share to newer, faster, and more efficient coins.
Bitcoin’s Continued Functionality Issues
One of the predominate reasons Bitcoin should continue to increase in value over the long-term is due its functionality prospects in the global medium of exchange market. Bitcoin has the potential to become the predominant digital currency of the world. But to achieve this position Bitcoin needs be fast, have scale and be cost efficient, which right now it’s not.
Bitcoin has the distinct advantage of being the first, best known, most popular, and most valuable digital currency. However, its blockchain is relatively slow, not able to conduct a mass number of simultaneous transactions. In addition, Bitcoin transactions have become extremely expensive in recent months. These are negative factors and could cause Bitcoin to lose even more market share to other, quicker, and more efficient currencies, capable of carrying out similar functions.
Bitcoin Cash, Litecoin, IOTA and other coins can perform transactional functions more efficiently than Bitcoin can. Furthermore, there are a total of 1410 different digital coins now. The perception of Bitcoin’s inferior transactional qualities could cause for further weakness in BTC in the short-term.
To be fair, the introduction of the Lightning Network later this year should solve many of the scale, cost, and speed issues associated with Bitcoin, and BTC should recapture significant market share as these developments unfold later this year. But this is later in the year, and as we know nothing is for certain. In the meantime, Bitcoin could decline more in value short-term.
Governments’ Continued Crackdown on Bitcoin
Bitcoin’s price plunged towards the bottom end of its trading range recently as South Korea and other world governments seem to be intensifying their crackdowns on Bitcoin and its ecosystem of exchanges. South Korean authorities recently raided two more major exchanges Bithumb and Coinone in an attempt to “cool” the Bitcoin craze. The news of the continued clampdown effort from South Korean authorities caused a significant selloff in Bitcoin which brought the price down by approximately 12%.
South Korea is one of the biggest Bitcoin trading markets in the world, and the country is planning to pass a bill intent on banning Bitcoin trading in the country. If this ban materializes it could be the event to cause bitcoin to crash short-term, and any further government intervention in South Korea, or in any other major Bitcoin market will likely cause prices to test $10,000 and possibly fall significantly lower.
The Bottom Line
Although I am constructive on Bitcoin long-term, mounting fundamental factors, coupled with a troubling technical setup are likely to put additional pressure on Bitcoin prices in the short-term. The loss in technical momentum, a dramatic increase in institutional short interest, a cratering market share, a decrease in functionality outlook, and increased government scrutiny are all net negatives for Bitcoin in the short-term. Thus, the underlying fundamental and technical factors are likely to trigger a new leg lower in bitcoin, possibly taking the price of the digital asset below the all-important psychological level of $10,000.
Disclaimer: This article expresses solely my opinions, is produced for informational purposes only, and is not a recommendation to buy or sell any securities. Investing comes with risk to loss of principal. Please always conduct your own research and consider your investment decisions very carefully.
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Disclosure: I am/we are long BITCOIN.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.