Breakout or Bust: BTC/USD Triangle Approaching

The converging lines of a triangle formation are fast approaching for Bitcoin prices relative to the US Dollar (see bolded green and red lines on chart below) as the intersection where the right side of the triangle ends is nearly here.

This pattern has been developing for many months already, and continues to persist as traders often rely solely on technicals. BTC/USD looks poised to breakout to either side of this pattern, as the tip of the triangle is reached (see small circle in the chart below), volatility could spike dramatically. Will prices breakout or bust, we may soon find out. Below are my thoughts on Bitcoin's medium-term outlook.

Change of Trend on the Horizon

While Bitcoin prices have been mostly range-bound in recent months often trading sideways between roughly $6000 - $8000, the recent lower highs and lower lows - has increased bearish pressure and now that prices have further squeezed into this consolidated triangle pattern, the lower longer-term line is being tested at its core. 

It's also possible that the triangle itself will expand as this pattern continues to extend into the future, unless a definitive breakout changes the trend soon.

Volatility May Surge Around Time of Breakout

Either way, this situation looks like a volatility play, (with potential false-breakouts and reversals) but with the lack of options for most traders to use hedging methods, such as a straddle or strangle position, to manage risk without getting stopped-out prematurely. Although more advanced users are surely using synthetic approaches, combining the use of CFDs and the underlying, as well as futures (and other exchange-traded and off-exchange contracts), such approaches can be very dangerous due to margin calls that could leave an otherwise hedged position unhedged and naked).

In addition, Forex Brokers that offer margin-based bitcoin trading could halt trading or increase margin requirements abruptly, among other measures related to abnormally fast markets.

Talking of speed, while there is a difference between investing and racecar driving, day-traders might more closely associate with the latter for bitcoin and cryptocurrencies, so be sure to buckle in, unless you are in it for the long term.

Market Timing and Trading Strategies

In addition to trying to time the market, which is not an easy task even for professionals, longer-term crypto investors may be buying passively on a systematic basis, such as once per week, month, quarter, irrespective of market price (i.e. HODL'ers).

However, speculators still have a massive influence, especially miners who are users of the underlying and often forced to introduce supply into the market by selling it (to cover operational costs) - adding to the downward BTC/USD pressure. Of course, this has been true since Bitcoin's inception but the balance of economic incentives within crypto communities are constantly in flux, related to behavioural economics, and correlations in crypto adapt in ways we haven't yet fully modeled. 

Let's not forgot that aside from some well-established crypto assets that are strongly weathering the storm of 2018 (I will not shill any), the market is down, and the growing background noise about "$hit coins" blamed due to ICOs -are adding wood to the fire. Nonetheless, visionary investors willing to fund experimental innovation, along with the bags of project failures, know the pain of diversification, and the type needed in traditional Venture Capital (VC) investing when seeking exponential returns.

Systemic Events, Crypto Flash-Crashes & Normal Volatility

Comparable to massive single-day market gaps seen in markets such as foreign exchange in currencies like the British Pound, Swiss Franc, and Japanese Yen over the past 25 years, often related to geopolitical and monetary policy events, crypto markets could see a hurricane of volatility return yet with few warning signs and could last or be fleeting. Single large one-day moves could become normal again, along with flash-crash style market gaps.

Such warnings appear to be increasing in frequency and counterbalanced by positive news and developments from the crypto industry and greater interest in blockchain technology globally. While I am not sure of a directional indication over the short term for BTC/USD, I think the signs of incoming volatility are there, along with systemic risk introduced by stablecoins and centralized venues.

FUD: Fear, Uncertainty, & Doubt

Make no mistake, I am not trying to spread any fear, uncertainty and doubt (FUD) but instead think that volatility is a natural phenomenon in crypto due to network effects (as the value of bitcoin- one component of its effect - is proportional to the square of the numbers of users in its network), coupled with the devaluation of traditional assets relative to crypto's due to its undilutable limited supply, and pre-programmed inflation controls, volatility is part of the equation in my view. This chart gives a different view of BTC/USD price trajectories.

Longer Term View and Logarithmic Chart

In closing, I think it’s useful to also gauge the BTC/USD chart with price history displayed logarithmically (as seen above), to appreciate how minuscule the bubble of 2018 is (see longer-term monthly chart below), compared to the many bitcoin bubbles that preceded it. I doubt 2018 will be the last crypto bubble, but that doesn’t mean I'm bearish (note: the author holds a long position in bitcoin and related crypto instruments). Diversification remains a challenge, along with investor education about how to securely generate and store private keys, and safely manage crypto assets, when transacting with mobile, and desktop wallets, blockchain networks and crypto exchanges. 

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