Looking at Bitcoin (BTC) on BitMEX, we see that XBTUSD is near resistance near $3,700 (Figure 1). Bitcoin (BTC) would have to be above that point in order to get constructive. $3,700 is the location of a diagonal lines that have acted as both resistance and trigger points for big down moves.
Assuming a catastrophic down move is not on the horizon, there may be two scenarios for a range trade:
In the first scenario, Bitcoin (BTC) hovers between $3,700 and $3,800. We have reliable intelligence that roughly $3,800 is the cost of production for Bitcoin (BTC) — with miners paying six cents a unit for electricity. Bitcoin (BTC) may pin itself to that level. Choppy sideways price action might cause frustration and boredom, limiting readiness for the next big trend.
The second scenario involves a drop in the cost of production in Bitcoin (BTC) as miners are able to renew power contracts at prices well below six cents per unit. Under this scenario, miners may be incentivized to sell quickly or hedge with CME futures. That could create even more extreme volatility and create multiple retests of the recent low in Bitcoin (BTC) at $3,200.
From a trading perspective, any downdraft could be ongoing and amount to an extended stop fishing exercise. In this case, it could become very difficult for longs to hold on. Expiration of CME Bitcoin futures on Jan. 30 may create a liquidity event in which whales give up, miners sell or hedge, and longer term holders like traditional asset managers buy aggressively. We can see this liquidity event occurring between Jan. 30 and Chinese New Year on Feb. 4.
Starting in early February, Bitcoin (BTC) may complete a phase called “Last Point of Supply (LPS).” LPS comes from a theory called “Wyckoff Phases and Events” (Figure 2).
If the theory is applied to Bitcoin (BTC), the above-mentioned scenario analysis for Bitcoin (BTC) fits into that framework. Figure 3 shows a possible version of the choppy range and eventual breakout using basic Elliot Wave.
Bottom Line: If there is to be a true bottom in Bitcoin (BTC), it requires bears to be dug in and convinced, and it requires price action that makes it nearly impossible for people to hold long positions. The Wyckoff analysis points to a choppy second half of January followed by a dramatic bottom near Chinese New Year (the year of the pig).
We were able to piece this work together with help from the Crypto.IQ Trading Desk. The Wyckoff framework is something the Desk has been using to avoid the “Twitter trap” where a five percent up move makes everybody bullish, and a five percent drop makes everybody bearish.
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