How to Approach the Current Volatility in Bitcoin

When Bitcoin first made its introduction, the developers behind the original cryptocurrency set out to prove that peer-to-peer (P2P) transfers of monetary instruments can occur without the use of a human intermediary. In its place, the blockchain introduced the concept of shifting the trust model from human hands to digital ones.

So far, the experiment has proven wildly successful – and some might argue as we witness the steep correction of BTC that it’s been too successful. Bitcoin gave rise to many other innovations beyond simple P2P transfers, such as the concept of smart contracts and oracles, which essentially connects blockchain architectures with off-chain data.

Bitcoin a Victim of Its Own Success

From an investment perspective, the harsh reality is that all eyes are on BTC because of its astounding success. Wherever Bitcoin goes, so too does the rest of the crypto sector. And while many efforts have been made to disengage certain cryptos from the price action of BTC, such attempts have so far proven fruitless.

Many wonder why this happens – why is it that our favourite altcoins are so entwined with the fortunes of Bitcoin? The answer is quite simple, across pretty much all exchanges, the primary crypto pair for any coin is Bitcoin (BTC). Because Bitcoin serves as the main pair for so many coins and tokens, it has a large effect on their values.

This means that even if you’re not interested in acquiring Bitcoin, you should still analyze its sentiment as this is the blockchain market’s benchmark. So, under this context, let’s critically examine where BTC could be headed next.

Is Bitcoin at $100,000 Still in the Cards for 2021?

When Bitcoin broke above the $60,000 barrier, it was exciting for many reasons. Primarily, BTC has never been this high – over 3X higher than its 2017 peak. $60,000 also represents a key psychological level. We humans tend to prefer nice even numbers.

Just as importantly, at that height, Bitcoin was then 60% of the almost-mythical six-figure target of $100,000. Another $40,000 and Bitcoin would hit the mountaintop. Of course, such a magnitude of trading action is par for the course for Bitcoin and not outside possibility at all.

It turned out to be a massive letdown when BTC couldn’t deliver the goods. Instead, it went on to incur an approximately 46% correction relative to the time of writing price of $34,790. Currently, people are left in limbo – should they buy BTC now at this discounted rate or avoid it in the hopes of a better discount later?

One article posted on NewsBTC suggests that Bitcoin can still hit six digits this year. Specifically, the author points to technical reasons why you should believe in BTC:

Bitcoin has now spent 17 days trading within the $20K to $30K range. While not a high number, it is the first time that this has happened. This means that there is an air pocket below the $30K line. It explains why traders have been battling to keep the price above $30K.

If the price can hold this line for the next month, then it is likely that we will see $100K per bitcoin by year-end. Holding at a critical point means that there is still faith in the market. People are buying back in because they believe that the coin has hit its new bottom. And that might just be true.

Other analysts have chimed in, such as Vinny Lingham, who noted that if BTC can maintain a trading range above $30,000, then $100,000 is a credible target before the end of 2021.

I’m prone to agree that BTC can move to six digits if it can hold 30k. But the question then becomes, how likely is this?

BTC Needs Support at Lower Thresholds

Because of the tremendous volatility involved in cryptocurrencies, it’s helpful to analyze the digital market through other mechanisms besides just price and time. For Bitcoin, I charted a scatter plot analysis, which assesses month-to-month profit/losses or magnitude (trading action) over price.

BTC Needs Support
BTC needs to build technical support at lower price thresholds before moving to new record highs.

As you can see from the chart, the key characteristic of the current Bitcoin rally is one of bullish extremes. Since driving past the critical $20,000 level, BTC’s MoM profits are abnormally high — we’re talking 14%, 30%, 36%, 42% and nearly 48%. Conversely, the MoM downside is rather tame — one loss of 35% and the other two losses being 15% and 2%.

Just by common market principles, you would expect extremely bullish sentiment to be corrected with bearish sentiment. From there, the asset should enter a period of equilibrium before (hopefully) moving higher again.

But another telltale sign that Bitcoin will correct is that the trading action didn’t “fill in” support levels between $15,000 to $30,000. Instead, BTC mostly rocketed to $40,000 and beyond in quick fashion. This dynamic suggests that in order to garner support for a trip to six digits, Bitcoin must develop a foundation at lower price thresholds.

Also important is that the trading action needs to calm down. Historically, BTC trades within a magnitude range of +20% to -20%. In recent months, the trading range has averaged above 34%, which is abnormal. In my opinion, Bitcoin must settle into a normal trading pattern to build its foundation. From there, we can talk about $100,000 and maybe even higher.

Possible Buying Opportunity Ahead

I want to caution readers that everyone should perform their own due diligence. You don’t want to read an article or two and gamble your hard-earned money on a whim. There are many resources in the blockchain sphere, so I encourage you to test everything that you read.

With that caveat in mind, I am personally not convinced that going all-in on BTC right now is the best move. Instead, I’m looking to keep the powder keg dry for more opportunities later. Again, you must appreciate the rhythm of the market, the yin and yang of investment speculation.

We’ve already enjoyed a massive upswing with Bitcoin and other cryptos. While that alone doesn’t guarantee that the sector will plummet, much evidence suggests that BTC needs a break. And I don’t think that break is going to occur at $100,000.

Disclosure: The author held a long position in BTC.

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