Bitcoin Starting to Attract More Attention Again


Bitcoin breaking out to the upside again in its march forward has many wondering whether they should invest in it. This should only be done if you understand how to read a chart.

To those who seek to understand financial markets fundamentally, Bitcoin trading presents itself as quite a conundrum. If you are prone to limit your view to whatever beliefs you have in the real world, and how these objective influencers may affect the price of an asset, you’re really going to be left completely confused when you try to understand a digital asset like Bitcoin this way.

Still though, they try their best, and we’re hearing now that the weaker U.S. dollar has brought on this recent rally, where it grew in value by 26% in just 10 days, between July 17 and July 27. We need to pin these things on something it seems, and this appeared as likely an explanation as any.

These people aren’t bothered by the fact that the USD and Bitcoin aren’t really correlated with each other, and exceptions aren’t enough to show a correlation. This isn’t even remotely close in fact. This does not even serve to be a reasonable explanation even if we forget that this does not match history, as people buy Bitcoin to speculate on Bitcoin, not the U.S. dollar side of the currency pair.

If they really want to speculate on USD, they would trade it against EUR, which at least isolates the relationship that has caused the dollar to drop. Sure, you can make much more money speculating on Bitcoin, but that’s because you are speculating on Bitcoin.

People aren’t trading in their dollars for Bitcoin because they want to trade the dollar’s decline, or that they are concerned about using Bitcoin (BTC) as an inflation hedge, because inflation is very low and quite a bit lower even than at the beginning of the year. When you have a gorilla in the room, no one will be looking at the baby gorilla playing in the corner, and with the BTC/USD pair, BTC is the gorilla as far as what drives people to trade it, where pairings between traditional currencies are balanced.

People aren’t buying gold for its inflation protection either, and this is like saying people are buying garden hoses to fight their house burning down when there is no fire. Higher inflation will eventually come, but we’ve done such a good job burning down the economy that this is a way off yet, although perhaps sooner than the Fed and others may think, given that they are using their previous projections before this as where this will settle into which neglects the stimulus we’ve provided since, which will eventually kick in.

Regardless, this is not on the horizon and won’t be for a while. People are buying both gold and Bitcoin lately because they see them go up and want to be along for the ride. If you attempt to figure out an alternative explanation, there is none, and none is needed.

We therefore should not be too concerned about whatever may happen to the dollar in the near term, whether it finds support soon or even continues its decline for a while, if we’re wondering about what may become of Bitcoin. Bitcoin trades in its own universe, the world of cyber assets, and trying to measure it by looking at things that happen down on Earth will just distract you and take your eye off the ball.

Gold is at least more fundamentally connected to Earth, although we do need to realize that it lives in its own world as well, and also has a mind of its own. While we can at least correlate gold to the USD, it’s too rough of a path to ever want to go down, and the path gold itself takes will tell you all you need to know with greater accuracy.

If You Want to Know Where Something is Headed, Watch Its Path

It is curious how so many people want to pin the movement of one asset upon another, where they may state that the dollar is weakening and gold is strengthening and we somehow need to look to the path of the dollar to see the road from gold’s perspective. It is not that these things don’t matter, as these fundamental outlooks can add credibility to a move in gold, but only as so far as it does. We can see all this from just looking at gold and that also happens to be the only thing that matters when holding it for fun and profit.

If you are looking to surf the waves, you might want to check the weather before you head out, but when you see a big wave and jump on it, the weather doesn’t matter anymore, the wave does. You ride it as far as you can, and when it’s done, you will know. This is the right way to ride the waves that asset trading produces.

Bitcoin, on the other hand, dances to its own beat completely, the beat that Bitcoin traders make when they ride the huge waves it produces. It is maddening to predict very far out, and those who only feel comfortable being in something when they can see the way forward well enough are not going to like this, and given their perspective, it is better for them that they don’t.

Charts are very helpful with stocks, they are much more important with gold, but they are essential with Bitcoin. Charts aren’t just the most important tool, they are the only tool, unless you have a genie or have great psychic powers. The only data we have is price data, and while that’s the only thing that needs and matters anyway, if you aren’t comfortable interpreting it, the only thing else that you can do is guess.

We always should be striving to limit the amount of guessing that we do with our investments and trades, and Bitcoin is clearly the latter and does require trading skills of some sort to do well with. Investing means buying something and holding it for a good while confidently, but Bitcoin cannot be held by anyone this way confidently, no matter how good you are.

The massive amount of volatility should serve to seal the deal for prospective guessers, as Bitcoin can drop a bundle and really isn’t the sort of thing that we should be wishing to try to impose our beliefs upon. They don’t count for anything in the end and can only serve to distract us from what actually goes on, and not jump off when you need to, and not even wear a lifejacket because you don’t pay enough attention to the high risk with this.

There are advisors out there that both share their beliefs of favorable conditions with Bitcoin and recommend it to be held in a little piece in typical portfolios, which is actually more amusing than it may first appear to be.

If the conditions matter, then you’d never want to be telling anyone to hang on to it in such a way as they do, as if people do this, it can’t matter where this rollercoaster is heading right now as there will be so many ups and downs to come as well as a future no one is really that sure about.

We can form outlooks over time about just about anything, but Bitcoin is not one of those things that you can pin any outlook on, short of an inflation rate so high that people would actually drive up demand for it for this reason.

Another story making the rounds is that Bitcoin is going up due to concerns about national debt. People say that the only two things that you can count on is death and taxes, but we should change this to death and national debt growing. If the Libertarian party ever came to power, the taxes claim might end up being wrong, but no one is going to fix the debt problem because it is way too out of control and we have gone too far.

If we could ever bet on national debt rising, we’d have a sure thing on our hands, and if this makes Bitcoin bullish, we need to put all of our money into it. Sadly though, this isn’t true, as once again, people buy Bitcoin because they want to speculate on Bitcoin itself, not because we’re getting ourselves in such trouble fiscally with plenty to come, a song that plays louder year after year with no break.

All assets that trade have a mind of their own actually, we just pretend that they don’t and are determined by whatever exogenous factors we like to use. Bitcoin thinks completely for itself though and it is even more important to see what it is thinking over time, and in particular, to respect its power.

Bitcoin Can Be Traded Successfully, But Only if We Respect It Enough

The way we respect the power of an asset is to manage risk more tightly than we would if we were trading something far less powerful. When big waves can come on so quickly and so violently, you need to stand closer to the edge of the ship so you can escape when they do hit, as you will need to act faster than normal, a lot faster.

Looking at Bitcoin’s chart this year, it took a massive hit when the coronavirus wave struck, at a time when the things that are seen now as potentially propping it up, a weakening dollar and debt about to explode, just didn’t get it done. However, when you see Bitcoin people run for the exits like the stock investors did, you need to not be left behind.

Bitcoin’s plunge during this time wasn’t that much more notable than what happened with stocks, dropping by a half versus the one third shave that stocks got. However, this was nothing special for Bitcoin and this is was a matter of seeing stocks take a Bitcoin-like dive.

Over the course of the next few months, Bitcoin climbed back to fairly close to where it was prior to February’s plunge, where it plateaued and remained in a range until recently. This wasn’t a bad hold over this time though as the support off of the first pullback held up and we’ve made higher lows during this plateau, lending support to the idea that the next move is more likely to be up.

A swing trader who may be looking to enter at this point would set their entry at $10,170, right above the resistance during its attempt to break out. The goal now becomes to ride it out, and how much room we give it will depend on our particular timeframe, where we may want to take profits at the first sign of real weakness or let it ride a little, but we do not want to be preferring holding on for more so much that we put ourselves in a bad position where the odds favor giving back even more.

We don’t speak very much about trading Bitcoin here because this truly is a game of skill, requiring a higher level of proficiency than with other assets, because this asset can make look all other asset types look tame in comparison.

We don’t want to be putting people in uncomfortable situations, and even though an asset like this can look good enough to recommend at a given point of time, like this breakout play would be, this is the big leagues and this tiger is considerably more ferocious than even the wildest of stocks.

It is worth noting for those who like to hunt big game and are up for the experience, that the higher the volatility, the more we need to limit the size of our mistakes and be particularly careful when our trades go in the red by a meaningful amount, as there is more danger here.

Normally, we want to seek more balance, where if for instance something is only a bit more likely to keep going than not, we may wish to stay in, but with the way Bitcoin can drop, we require more bullishness to make it worth our while to stick around, where we need to both be more diligent toward losing and be more protective of our profits than normal.

This is also something you don’t want to be doing with actual Bitcoin if you don’t have to, as we need to do this right if we can, and trade Bitcoin futures as long as we can manage the minimums, where you can trade at the click of a mouse in addition to the other advantages over buying and selling the stuff on your own.

You can also trade Bitcoin futures on margin, if you are up for the biggest game there is, leveraged Bitcoin trading. No one should do this though unless they can pass the test of trading unleveraged positions well enough, as we want to make sure that we are ready to make money at this first before we leverage, or we’ll be leveraging our losses.

If you don’t know what to do with Bitcoin, you should not be looking to others to tell you when to jump in, as being able to make your own calls is a prerequisite. You are behind the wheel by yourself with this one, and you do need to know which way to steer it. We also need to pay close attention to the weather, as one day it can be simply beautiful and the next may bring a wicked storm.

Bitcoin is a great instrument to learn to trade on, and you’ll need to learn plenty before you should be putting very much money on the line. It does look like it could still run up from here, but don’t take your eyes off the ball.

Andrew Liu


Andrew is passionate about anything related to finance, and provides readers with his keen insights into how the numbers add up and what they mean.

Contact Andrew: [email protected]

Areas of interest: News & updates from the Consumer Financial Protection Bureau, Trading, Cryptocurrency, Portfolio Management & more.