Where is the Bitcoin price going next?

8 years ago - Published by SAMT in Expert opinion, Finance, Fintech Land, Technical Analysis

Bitcoin prices skyrocketed last week and surged to all-time highs above $2.700, and this generated on the web a lot of articles about a possible bubble of this complex and strange asset.

Like all the financial assets, also Bitcoin can be studied in Technical Analysis using charts. One of the most common errors I have noticed, is the lack of a proper representation of this asset on the graphs.

In the chart below, you can see the BITCOIN/US DOLLAR FX SPOT RATE chart from 2011. It looks impressive but also misleading.

 

In fact the chart shown above, like most usually shown in the financial websites, are built using a linear (arithmetic) price scale. In technical analysis a longer timespan usually requires a logarithmic scale, especially if the prices changes are wide, more than 20%, like in the case of Bitcoin (1).

The difference between the two scales, is that the first, the linear, is plotted in such a way that the values on the scale are spaced equidistantly. Each unit change is represented by the same vertical distance on the chart, regardless of what price level the asset is at when the change occurs. The logarithmic scale is plotted in such a way that two equivalent percent changes are represented by the same vertical distance on the scale, regardless of what the price of the asset is when the change occurs (2).

Let’s see how the same chart appears when represented in a logarithmic scale. As you can see, the logarithmic scale, especially if the asset moves in large percentages, offers a better view of what's going on.

 

Curiously, I noticed that the graph of the last seven years of Bitcoin is very similar to that of gold in the seven years following President Richard Nixon’s decision to end dollar convertibility to gold in 1971.

 

In this last chart we have added a set of elements for a brief graphic analysis. The price is represented by a candlestick chart, to which we added a 200-day moving average and a Fibonacci retracement starting from the last low after the bear market of November 2013 – January 2015.

 

The first thing we note is that the parabolic price acceleration of 2017, is not as long as those of January and October 2013. Second, we note that the price levels in 2017 have exceeded for the first time the high of November 2013. This level, around 1.150/1.100 usd, is a good support since, in this area, the 200 days moving average, the uptrend line and the 61.8% Fibonacci retracement are likely to converge.

 

(1) http://www.investopedia.com/ask/answers/05/logvslinear.asp

(2) C. D. Kirkpatrick and J. A. Dahlquist, Technical Analysis: The Complete resource for Financial Market Technicians, II ed., 2011, pp. 220-1.

 

 

Mario Valentino GUFFANTI CFTe – SAMT Vice President – Swiss Italian Chapter – mario.guffanti@samt-org.ch

Disclaimer: the above article is for general information and educational purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.