Bitcoin Trading Alert: Strong Move in Bitcoin Possible
Bitcoin Trading Alert originally published on August 5, 2014, 11:31 AM
In short: we still support long speculative positions, stop-loss at $550, take-profit at $880.
The Bitcoin market is changing every day. We've read an article on CoinDesk about yet another exchange expanding its services to offer Bitcoin derivatives. OKCoin, a Chinese exchange, made an announcement today on the subject:
Chinese exchange OKCoin announced today it will add futures trading to its platform, saying it is one of the first major exchanges in the world to offer users the chance to trade futures denominated in bitcoin.
Founder and CEO of OKCoin, Star Xu, said it was part of the company's plan to bring institutional and professional trading tools to digital currency investors and help build the bitcoin trading platform of the future:
"Today's launch of bitcoin futures trading capabilities builds on the algorithmic trading tools we pioneered and launched on our platform last month. We have already seen a favorable response from institutional and individual investors. We are helping to make participation in bitcoin a more safe and stable process. The ability to trade futures will further cement our position as one of the world's leading bitcoin exchanges."
OKCoin's chief technology officer Changpeng Zhao said that OKCoin would ascertain it was gathering accurate pricing data with a US dollar index based upon prices from 10 different bitcoin exchanges.
The fact that Bitcoin derivatives are getting more and more available is generally a positive phenomenon. Entities not willing to take on the exchange rate risk (think - retailers accepting payments in Bitcoin) can hedge it. This means passing this risk on to other entities (think - speculators).
From a Bitcoin investor's perspective, futures will have three major features. Firstly, they'll improve liquidity, since opening and closing out contracts will most likely be quicker and less costly (in terms of commissions) than buying and selling Bitcoin via a Bitcoin wallet. Secondly, Bitcoin futures will enable investors to take short positions without much fuss. Thirdly, they'll offer leverage.
All of these may be advantages but one has to extremely cautious when using derivatives. Trading futures without properly understanding them may be dangerous and it might lead to losses higher than the initial investment. Because of that derivatives are most probably instruments appropriate for experienced investors.
One also has to remember that buying derivatives is not the same as buying or selling the underlying bitcoins. Exchanges regulate derivatives trading and they might close your positions in periods of high volatility - when you're either losing or winning big time. This is not the case with actual bitcoins.
For now, let's focus on the charts.
On BitStamp, we saw Bitcoin moving up and down yesterday on increased volume. Overall, the currency closed the day pretty much where it had started it. Yesterday, we wrote:
A slowdown is (...) what we've seen so far. Today (this is written before 10:00 a.m. ET), Bitcoin has been moving up and down and it currently is around yesterday's close. We might see an increase in volume today (the day is not over yet). At the moment, it would seem that the current period is a pause in the move up and not another slump. This could be somewhat confirmed by a move above $600 (dashed red line) in the next couple of days.
Today, we've seen some depreciation and the volume might be up again at the end of the day (this is written after 10:30 a.m. ET). The move hasn't been strong which doesn't suggest further depreciation at the moment.
Bitcoin is below $600 (dashed red line in the chart above) but above the recent declining trend line. Our take is that Bitcoin will stay below $600 before breaking out above this level and possibly starting another rally.
On the long-term BTC-e chart, we see Bitcoin below two possible medium-term trend lines (rising black lines) and below $600 (dashed red line). If you recall, yesterday we wrote:
The move up has been weakened now but it seems to us that this pause we're seeing now might in fact be short. Right now, a move above $600 on strong volume could be a starting point of another sizable rally.
The recent developments have brought some relief to Bitcoin investors. As we're analyzing the markets, we keep that in mind. But we're also making an effort not to get overly optimistic. We've seen some encouraging action but it is important to keep a cool head and apply one's investment strategy carefully. Our bet is still on a move up but we remain alert to any changes and will continue to communicate to you developments we see as important for the Bitcoin market.
We haven't seen major depreciation which suggests that the situation remains unchanged now. We look at the charts every day just as you do and we try to analyze the situation and come up with opinions you can include in your investment process. There are days when not much has changed in the market and it seems that we're in such a place just now. Bitcoin might have edged lower but the situation hasn't deteriorated and consequently we follow our strategy right now and favor long speculative positions.
Summing up, in our opinion long speculative positions might be the way to go now.
Trading position (short-term, our opinion): long, stop-loss at $550, take-profit at $880.