slatermaus

Inverse Cup and Handle, interest rates, and momentum

BITSTAMP:BTCUSD   Bitcoin / U.S. Dollar
1. Leverage traders have been selling in droves, around 8000 BTC have been liquidated in the last few days, however there's still a great deal more open positions (opened since the low-upper 30k range)
2. Long-short ratio has dropped to 18, significantly lower than the high in the upper 20s, but still quite high. This is largely due to lack of short interest (why have very few people been shorting?)
3. We saw how brittle prices were when the longs were overcrowded, creating a long squeeze, precipitating a drop in price (see previous chart). So in a sense, the longs became the de facto shortsellers to protect their profits and pull the rug out from retail.
4. Many indicators have turned bearish , the momentum is generally bearish , with lower highs and sluggish volume .
5. It looks most prominent on the H2 chart that there's an inverse cup and handle forming.

I don't believe the leveraged positions that opened in the 30s are looking to sell, which leads me to believe that the bottom will likely be in the low 40s. If by chance those who opened positions in the 30s cash out, we'll see a drop further.
This seems unlikely though.
What I dislike about this prospect is that even with those positions still open, they're supporting the price levels going forward. They could, at any movement, selloff.
Why?
In the long term, their interest rates will eventually be costing them gains, which in term would encourage them to cash out regardless.
The longer the period in which bitcoin price doesn't rise, the more interest rates will burn their profit margins. It is a similar problem options traders face.
If a given amount of time passes where they don't see growth that surpasses their interest rates, they'll be behooved to sell to protect profits, regardless of whether the price drops further.

In the most recent leverage-driven run to 58k (see previous post), we saw interest rates spike up to an equivalent of 138% per year.
Currently, interest rates are hovering at the equivalent of around 11% per year. This is not a heavy burn on profits, but if more leveraged positions try to crowd in, it'll have the inverse effect of holding for a long period.
Comment: Conflicting signals:
1. Inverse Cup and handle looked more like it turned into a symmetrical triangle that went south
2. Tweezer top of the weekly is a bearish signal
3. Short positions are back down, leveraged positions back down, long-short ratio is still significantly lower than what it was during the peak. This means that much of the price right now isn't supported by cheap credit (though a few thousand btc are still doing that)

4. Support at 43-44k is notable, but I could see it being "helped" by leveraged btc from dropping further. I don't want to say that the support was fake exactly, but it was given just enough margin credit to stop it from falling further.

Just, for the record, bitcoin, like nearly every other cryptocurrency, is officially a "decentralized" asset. This is fact. What is also fact is that as bitcoin's price has grown, so too has the financial power of people who benefit from its price manipulation. It is my hypothesis that as the price of bitcoin grows and less liquidity is available, the higher possibility is its manipulation. And it's not just a matter of individual traders, much of the price action you see is simply the work of sophisticated trading bots, a vast array of competing AIs
(or provided they're using the same|similar metrics for trading, an unintentional collusion of AIs)
This is not to say that one cannot make money on bitcoin or that it has no value, I won't draw these distinctions, but the Nozickian argument that absent a centralized governance, a de facto governance will emerge, comes into play. There is no governance of bitcoin, therefore with this hypothesis, governance has already come in the form of who has the deepest pockets and the best trading algorithms. All people like me can do is watch it and try to benefit from it.

Comments

Beautifully done piece on current market dynamics. Thank you for the deep insight. +Followed.
Reply
slatermaus IrfanCrypto
@IrfanCrypto, Thank you for your kind words!
Reply