Many times, our readers ask why we use technical analysis for a volatile asset such as Bitcoin. There have been several instances when my price predictions based on technical analysis have gone horribly wrong. But I must admit that it is not exactly a cakewalk to anticipate the future price movements of a security which is yet to be tagged as ‘stable.’
In this article, I will discuss all the factors that deeply affect the action in Bitcoin markets, and why trading with technicals is a tough job for price analysts.
- China Drives the Bitcoin Market – In March 2015, Goldman Sachs revealed in a report that Chinese Yuan dominates 80% of the Bitcoin trades. In an article titled Daily Volume in Bitcoin-Yuan Pair Best in 6 Months, I covered how the Chinese were highly active in bitcoin trading from November onwards. And this look is set to continue.
The Chinese government and monetary authorities have been aggressively pursuing easy monetary policies to stem the trend of declining GDP. Goldman Sachs has recently said in a note:
“Looking into the New Year, we expect policy to maintain a loosening bias on the full year basis (policy stance has been very supportive lately and it’s unrealistic to expect to become looser in the coming month). Activity growth may weaken again in the first quarter of the year, and bumpy growth deceleration will likely continue for the full year of 2016. We expect supportive policy measures to provide a key buffer to growth deceleration.”
And with Caixin’s latest China PMI falling for the tenth straight month, expectations have surged that another round of monetary easing may come sooner than later. Easy monetary policies make the loans cheaper, which excites the traders to trade more.
- Insufficient Liquidity in Derivatives – If the volume was less in the cash market, it is even lesser in derivative markets. According to today’s grab from bitcoin options exchange Coinut.com – posted below – the call and put options for 420 Strike Price have seen very little or no volume. The huge spread (due to illiquidity) makes it easier for someone with deep pockets to jack up or push down the prices, thereby, making it even tougher for the price analysts.
- High Speculative Interest – Amid a lack of strong fundamentals, it is hard to say with confidence if serious investors are putting their money in the cryptocurrency. The blockchain technology may be witnessing a huge inflow of investments but that in no way translates into higher investments in bitcoin. We have pointed this out earlier in Bitcoin Needs Hot Money to Reduce Volatility.
The higher volatility in bitcoin is on account of high speculative interest. This further makes it harder for consumers to make payments in bitcoin or store it as an asset. Investors are naturally risk-averse. Market rigging makes the job extremely hard for technical analysts as well.
The aforementioned factors contribute to poor calls from the analysts, exposing them to harsh criticism from the audience. But technical analysis is the only tool that is left with them … until Bitcoin has a strong fundamental backing.