Bitcoin Buy Opportunity | In search of the alpha

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Bitcoin has been tested and rebounded from previous support levels at $ 40,000 on Friday. It continued higher on Monday, closing above Friday’s high, and rallied again on Tuesday, closing above Monday’s high. This is positive price action. It could also be a signal that this sell-off that started in early November and took the king of cryptos down 43% in just two months is over.

Volatility is what makes Bitcoin a very compelling trading vehicle. With a contract size of 1/10th of bitcoin, CME “micro” bitcoin futures are small enough to allow our clients to take strategic long positions with reasonable downside risks. We featured micro-bitcoin futures in an August blog post (you can check it out here) and indicated that we would be watching the market. We believe a buying opportunity is at hand.

Graphics.woobull

Belief-Based Bitcoin

Some investors see Bitcoin as an alternative currency. We think it is still too volatile for that. Would you count on a currency that could lose 43% in just 2 months? Others simply see it as a store of value like gold. This point of view is more realistic. Bitcoin beat the pants off gold (see chart above), silver, and every fiat currency on the planet. His track record is short (12 years) but simply impressive. What gives bitcoin its value? Belief. Things are ultimately worth what people think they are worth. It doesn’t matter if it’s stocks, fiat currencies, or bits of computer code that we call “bitcoin.”

Think of any cash transaction. This can only happen if both parties agree that the paper tickets exchanged are worth the amount printed on them. Modern currency is not backed by gold, silver, or any other fixed asset beyond the “good faith and credit” of the government that issued it. The only thing that makes a $100 bill worth $100 is the shared belief that $100 is what it’s worth. As of this writing, enough people believe in bitcoin that each bitcoin is worth nearly $44,000.

El Salvador replaced its national currency with Bitcoin in September, opting for volatility rather than debasement. The Wall Street Journal on Wednesday published an article that begins with the following line “The Turkish lira has become so volatile that the Turks have abandoned the local currency for assets with an even riskier reputation: cryptocurrencies”. Changes in belief lead to changes in prices.

Bitcoin Trading on Fear and Greed

Unlike other “hard” commodities such as soybeans, gold or crude oil, Bitcoin’s supply is fixed by its algorithm. No more than 21 million bitcoins will be mined. The algorithm makes it harder to mine each new coin. With supply fixed and demand based solely on belief (for now at least), our analysis of this market will be purely “technical”. It’s just a fancy way of saying based on a graph. The price charts illustrate the story of the powerful human emotions that underlie all markets: fear and greed.

Reuters/Datastream

First-month micro bitcoin futures settled on Wednesday for $43,825 per bitcoin. Since his contract size is 1/10th of a bitcoin, his closing contract value was $4,382.50. The chart above shows the big move down that started in November and stopped at around $40,000 – the same level of support as the previous move down in September. $30,000 was the market support level in May and June. This level also held.

Does that mean $40,000 will do the same? Not necessarily. What the chart above tells us is that the level of fear responsible for the latest decline is lower. Lower levels of fear can provide an opening for the re-emergence of greed or even fear of a bullish nature like FOMO (fear of missing out). Bitcoin is also extremely oversold and vulnerable to corrective rallies.

What to do now

Our clients may want to consider buying CME February micro bitcoin futures for up to $45,000, hoping bitcoin hits our upside targets of $52,000 and $60,000 in the futures contract. of the first month. We do not plan to use stop-loss orders, so we recommend setting up 100% of the contract value – $4,500 per contract if filled to $45,000 – to avoid the possibility of a margin call. The price action at $52,000 will determine whether we break out of it or wait for $60,000. These two targets are based on Fibonacci.

Please note that you need a futures account to trade the markets in this article.

This material has been prepared by an employee or sales or dealing agent of RJ O’Brien & Associates (“RJO”)/RMB Group and is, or is in the nature of, a solicitation. This document is not a research report prepared by a research department. By accepting this communication, you acknowledge that you are an experienced user of the futures markets capable of making independent trading decisions, and agree that you do not rely or rely solely on this communication to make trading decisions.

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Editor’s note: The summary bullet points for this article were chosen by the editors of Seeking Alpha.

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