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Why Now May be a Good Time to Add Bitcoin to Your Position

Disclaimer: Opinions and views in this article should not be taken as investment advise. The author owns bitcoin, ethereum and other cryptocurrencies, but does not engage in active trading.

As several market analysts, and most recently hedge fund manager Dan Morehead, have pointed out, we may already have seen the bottom in the price of bitcoin for now. Although the sell-off in the entire cryptocurrency space has been a violent one, signs are now indicating that Wall Street insiders are preparing to move institutional money back into the game to be part of the next run-up in prices.

While it is very difficult to tell where exactly a bottom will be formed, studying the bitcoin chart can give us some indications. Let’s take a look at some important observations right now:

- From a technical analysis-standpoint, the price of bitcoin has bounced back above the key support level of USD 6,000, and is now consolidating around the USD 8,000 level
- The strong bitcoin comeback on January 6 saw prices rise on unusually high trading volumes, a sign that lots of money is sitting on the sidelines ready to buy into the market
- Technical indicators like the Relative Strength Index is still at very low levels, meaning there is significant potential for the price to move up from current levels
- Several prominent financial commentators have come out and argued that the price of bitcoin may have formed a bottom

A lesson in overconfidence

The year 2017 was one of extreme optimism, both in the stock market and to a much greater extent in the cryptocurrency market. The price of bitcoin went into a parabolic rise that seemed unstoppable, in particular in the latter half of the year.

Bitcoin analysts had to raise their price predictions throughout 2017, as the price accelerated faster than anyone had anticipated. Dips in the market were also shallow and short-lived, meaning traders became confident that buying into any dip in bitcoin was a surefire way to secure quick profits.

However, enter 2018 and this turned out not to be the case anymore. The dip that started in late December last year went on and on as prices fell further. Bitcoin traders, who had gotten used to always profiting from ‘buying on dips,’ panicked, and we entered a period of risk-off sentiment.

Where are we going from here?

With falling prices, there are new regulatory crack-downs announced every week, exchange hackings, and banks banning crypto purchases on credit cards, and so we should all expect markets to remain volatile for some time to come.

Still, don’t forget that there is now a lot of money waiting on the sidelines, trying to call the bottom of bitcoin. When they all agree on where that bottom is, expect the bounce to happen in a strong way. There will undoubtedly be pullbacks along the way, as the fears mentioned above come back into focus. However, the overall trend is going to be up in 2018.

Realistically speaking, we may see a final move down in the price of bitcoin, to an area between USD 5,500 and USD 6,000. This is a key support level where the price also consolidated back in October and November last year. Alternatively, we could see prices surge up from the current level. To be sure that such a reversal is sustainable, we should see a strong move through the USD 8,000 level, with lots of money coming into the market from the sidelines.

An established price above the USD 8,000 level may in that case be a good entry point for new long-term investors in bitcoin.

Although buying when there is still fear in the market is difficult, it has historically proven to be the most successful strategy. This is so difficult because you basically have to do the opposite of everyone else. You need to buy when everyone is telling you to sell. Doing that takes a lot of courage.

This is largely the same as the Relative Strength Indicator (RSI) principle: when the selling intensifies and prices have declined for a period, eventually the market reaches ‘oversold’ territory, as the RSI calls it. This is where we are right now. In bitcoin, buying in oversold territory has historically proven to be a very profitable strategy.

However, don’t forget to always do your own due diligence and determine what level of risk you are comfortable with should you choose to invest. For now, bitcoin is still a rollercoaster ride, but it is surely an interesting journey to be part of.

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