Recent Price Action
Bitcoin – It appears that Bitcoin may have formed an important triple bottom @ 39,713 (Chart #1). As I mentioned in my previous crypto update, this is a critical support level for BTC. If Bitcoin has any chance of recording a new all-time high in 2022, it must stay above 39,713 on a weekly closing basis. So far, the bears have been unable to push BTC below this major support level. This is “good news” for the bullish camp.
Chart #2 displays BTC price action for the past 12 months. As you can see from the chart, Bitcoin generated a massive double top. Based on technical analysis, this is considered a bearish chart pattern. In order to eliminate this bearish pattern, BTC must produce a weekly close above 68,906. It’s highly unlikely that Bitcoin will exceed 68,906 any time in the near future. Therefore, the daily chart will remain bearish until traders can create enough momentum to penetrate this critical resistance level.
The Aroon Oscillator is a momentum indicator designed to forecast temporary tops and bottoms in stocks, commodities, forex and crypto. The oscillator fluctuates between -100 and +100. A reading of -100 represents a market that is deeply oversold. Conversely, a reading of +100 indicates a market that is extremely overbought.
During the past few years, the Aroon Oscillator has worked incredibly well with Bitcoin. The oscillator has captured all of the major turning points. Chart #3 provides nine months of BTC trading activity. The oscillator is located at the bottom of the chart. As you can see from the chart, the oscillator delivered a reading of +96 on 10 November, which marked the all-time high @ 68,906. On 10 December, the oscillator recorded its lowest reading in over 12 months, when it declined to -96. The price of Bitcoin dropped to 39,713. Based on the oscillator, a major low was formed on 10 December.
Ethereum – Despite the fact that Ethereum has been drifting lower during the past few months, the intermediate-term chart pattern continues to remain bullish. The critical support level is 2,807 (Chart #4). If ETH generates a weekly close below this support level, the chart pattern will turn bearish. At least for now, it appears that Ethereum will stay above 2,807.
Chart #5 provides intraday price activity for the past five trading days. ETH violated the bearish trendline on 19 January when the price exceeded 3,132. This is a short-term bullish signal for ETH.
Fibonacci ratios have worked extremely well with all cryptocurrencies, including Ethereum. Chart #6 includes the ratio levels based on trading activity for the past nine months. As you can see from the chart, ETH has violated three Fibonacci levels since this mini-bear market began on 10 November. The next important Fib ratio is 61.8%, which corresponds to an Ethereum price of 2,914. So far, the 61.8% level has not been violated. It’s very important for ETH to remain above 2,914. If this support level is violated, the price could fall very quickly to the next Fib level @ 2,384.
Dogecoin – One of the most exciting coins in 2021 was Dogecoin. DOGE became incredibly popular in February 2021, when Elon Musk began mentioning the token in his Twitter conversations. Between February and April, Dogecoin generated an incredible rally of 2,281%, as the entire global crypto community became obsessed with Dogecoin (Chart #7). The rally in DOGE is a perfect example of what can happen to a speculative asset when a mania develops, and investors become fearful of missing out on the huge gains. This phenomenon is known as FOMO, and it usually occurs near the end of a massive rally.
DOGE is nothing more than a meme. The token has very few practical use cases. In fact, the only legitimate use case is that Dogecoin can be used to pay for merchandise on the Tesla website. Most likely, DOGE will fall to its intrinsic value, which is probably less than one cent per token. In fact, DOGE has declined 78% during the past eight months.
Why Is Bitcoin Considered “Gold 2.0?”
Over the course of the past decade, many people have referred to Bitcoin as “Gold 2.0.” Since its launch in January 2009, Bitcoin has always been compared to gold. Why is Bitcoin constantly linked to the gold market? Because BTC has many of the same characteristics as gold. Let’s review the features and characteristics of BTC and gold.
Six Characteristics Of Gold
Gold has acted as a monetary instrument since 1500 BC. This means that investors have trusted the yellow metal for the past 3,600 years. Why do investors continue to include gold in their portfolios? Because it has six important characteristics which have stood the test of time. Let’s briefly review each characteristic.
Medium of exchange – Admittedly, gold is a poor medium of exchange for daily transactions between customers and merchants. However, beginning in July 1944, it became the official medium of exchange for the Bretton Woods System, which consisted of the largest industrialized countries on the planet. Specifically, 44 nations signed the Bretton Woods Agreement on 22 July 1944, in which each nation was allowed to exchange its domestic currency for physical gold in an effort to promote the trading of goods and services among member nations. Despite its limitation as a current-day medium of exchange, gold has certainly been used as an important medium of exchange for some of the wealthiest countries in the world. Even today, global central banks use gold as a medium of exchange.
Store of value – Historically, gold has served as one of the greatest stores of value among all asset classes. What is a store of value and why is it so important? Any type of asset or investment vehicle with the ability to maintain its purchasing power, is considered an excellent store of value. This characteristic is critically important because it allows investors to judge which investment has the ability to perform well during periods of currency debasement. The price of gold increased substantially each time global central banks launched a new money printing program. Specifically, money printing programs were introduced in 2001, 2008, 2015 and most recently in 2020, in response to the global pandemic. In each of these instances, gold acted as an incredible store of value.
Portable – Even though other assets are considered to be more portable, gold passes the portability test. Investors can easily move physical gold from one location to the next, with minimal effort. This is particularly true of gold coins.
Durable – Gold has been in existence for 5,000 years. Arguably, it is the most useful metal on earth. Why? Because gold is a good conductor of electricity, it does not tarnish or oxide, and it is extremely malleable.
Fungible – Gold is fungible because it can be easily replaced with an identical coin or bar. For example, let’s assume Jane decides to sell her 10-ounce gold bar. Six months later, she wants to purchase another 10-ounce gold bar. Based on the fact that gold is fungible, both of Jane’s bars are considered to be identical within the precious metals industry. They have the same value. Fungibility definitely adds value to gold as an investment.
Divisible – Gold can be split into various weights, sizes and measures. For example, an investor can purchase 1-ounce gold coin, 10-ounce gold bar, 100-gram gold bar, 1-kg gold bar, etc. The divisibility of gold adds to its popularity as a long-term investment.
Six Characteristics Of Bitcoin
As a you can see, gold has several favorable characteristics and highly desirable attributes. What about Bitcoin? Can BTC match gold in terms of its six main characteristics? Let’s examine the details.
Medium of exchange – How many merchants do you know that will gladly accept a bar of gold in exchange for merchandise? Of course, the answer is “zero.” Although gold is used as a medium of exchange between various governments and central banks, it has very little practical use in the “real world.” Bitcoin, however, is an excellent medium of exchange. Thousands of merchants around the globe will accept Bitcoin as a method of payment. Therefore, Bitcoin is superior to gold in regard to medium of exchange.
Store of value – During the past decade, Bitcoin has dramatically outperformed gold as a store of value, preserver of wealth and hedge against inflation. Even though BTC only has a 12-year track record, it is considered a much better store of value.
Portable – Is it easier to carry a gold bar in your purse or an unlimited amount of Bitcoin in a digital wallet? The answer is obvious. Bitcoin is easily more portable than gold.
Durable – As we discussed, gold has been in existence for 5,000 years. Therefore, it must be extremely durable. However, BTC is also highly durable. Various governments have attempted to eliminate Bitcoin for the past decade. So far, they have failed miserably. However, that doesn’t mean that they won’t succeed in the future. Until BTC accumulates a longer track record, gold should be considered more durable.
Fungible – The fungibility of gold is a double-edged sword. Based on the fact that it can be replaced with an identical coin or bar, it can also be easily counterfeited. Bitcoin will never experience this problem. BTC is legitimized 24 hours per day through the Bitcoin blockchain. Consequently, BTC is much more fungible than gold.
Divisible – As we discussed, gold can be split into various weights, sizes and measures. However, it’s not an easy process. It takes a considerable amount of time to divide gold into various denominations. Bitcoin avoids this problem because it is digital. Therefore, BTC can be infinitely divided into any numerical value. Clearly, this makes BTC more divisible than gold.
Bitcoin Is Gold 2.0
Without question, gold is an incredible investment vehicle. It has stood the test of time for centuries. However, as we just demonstrated, Bitcoin is superior to gold when measured against the six major characteristics. Bitcoin is superior to gold in 5 of 6 characteristics. Therefore, BTC is the winner. Over the course of the next several years, Bitcoin will gradually be viewed by the global investment community as “Gold 2.0.”
Will Bitcoin Outperform Gold in 2022?
Chart #8 compares the performance of Bitcoin and gold over the course of the past 12 months. On a relative basis, Bitcoin has outperformed gold since January 2021. However, during the past three months, gold clearly has functioned better than Bitcoin. What about 2022? Will Bitcoin generate a higher rate of return compared to gold? Of course, it’s impossible to forecast. However, gold has the early lead as we wrap up the first few weeks of the year.