How to Navigate the Treacherous Waters of the Bitcoin Crash

Until just recently the Bitcoin price poked its head above the psychologically significant $30,000 level. At the time of writing (July 21), BTC is trading hands at approximately $31,500. While that might be a relief to those who are long-term stakeholders in the original cryptocurrency, the damage may have already been done.

Changing TImes and A Dynamic Marketplace

Undeniably, the virtual currency sector enjoys a baseline of mainstream credibility that prior rallies failed to engender. Today, business media outlets don’t just focus on the Bitcoin price but rather on all the leading protocols and applications that stem from the underlying blockchain technology. Attracting new enthusiasts, it may be little surprise that the crypto market reacted the way it did earlier this year.

Nevertheless, enthusiasm alone won’t sustain digital assets nor spare them from corrective pressures. While the fundamentals for cryptocurrencies and blockchain reward tokens – that is, their ability to decentralize and democratize rarefied and obscure financial products and services – have attracted investors, at the end of the day, collective human emotions determine the trajectory of capital markets.

Isaac Newton – Gravity and his Stock Trading

In the spring of 1720, renowned physicist and mathematician Sir Isaac Newton was quite the speculator. According to the Wall Street Journal’s Jason Zweig, Newton “owned shares in the South Sea Company, the hottest stock in England.” However, things took an unfortunate turn:

Sensing that the market was getting out of hand, the great physicist muttered that he ‘could calculate the motions of the heavenly bodies, but not the madness of the people.’ Newton dumped his South Sea shares, pocketing a 100% profit totaling £7,000. But just months later, swept up in the wild enthusiasm of the market, Newton jumped back in at a much higher price — and lost £20,000 (or more than $3 million in today’s money. For the rest of his life, he forbade anyone to speak the words ‘South Sea’ in his presence.

It was a lesson that Newton never forgot. Human emotions represent the ultimate arbiter of an asset’s price. But is there a method to determine the trajectory of such emotions?

Bitcoin and the Fibonacci Sequence

One of the most famous formulations in mathematics, the Fibonacci sequence represents a series of numbers undergirded by the so-called golden ratio of 1.618 (or inversely 0.618). From the number of petals on a flower to the expanding cylindrical configuration of seashells to even the shape of the human fetus, the Fibonacci sequence is everywhere.

Always looking for an edge, market analysts long theorized that the same natural frequencies apply to gyrations in stocks and other tradable assets. One popular application is to “anchor” a Fibonacci sequence to a decided peak in market valuation to identify future support and resistance areas. Most technical analysts deploy the following ratios for their Fibonacci retracement calculations: 61.8%, 50%, 38.2%, and 23.6%.

Keep in mind that 50% is not part of the golden ratio. However, analysts use 50% as an important gauge as it basically splits the difference between the 61.8% and 38.2% retracement levels. Another criticism is that Fibonacci retracements are arbitrarily applied and are therefore ultimately meaningless.

Granted, no methodology involving an unknown future event will ever be perfect. However, Fibonacci retracements appear to command legitimacy for the reason that markets tend to be emotional because the underlying actors themselves (human investors) often react emotionally.

Since humans are obviously integrated with nature, it follows that a methodology used to better understand natural phenomena could at the very least provide useful insights. With Bitcoin, there’s more than enough material for even critics to stop and ponder.

Watch These Critical Retracement Levels

Back in mid-April of this year, Bitcoin hit an average daily high of $63,347. Since then, BTC has had trouble sparking positive momentum, eventually succumbing to severe bearishness. But how low can Bitcoin go? Fibonacci retracement levels may provide the clue:

  • 61.8% retracement (of $63,347 peak): $39,148
  • 50% retracement: $31,673
  • 38.2% retracement: $24,198
  • 23.6% retracement: $14,950

Interestingly, the psychological threshold of $30,000 is very close to the 50% retracement price of $31,673. Currently, as I mentioned above, BTC trades hands at a little over $31,500. Unless it convincingly breaks above $31,673 (and in all honesty, it needs to challenge $39,000), I wouldn’t be a buyer of Bitcoin since the bears likely still control the market near term.

BTC trades hands
Bitcoin price thresholds to watch based on Fibonacci retracement analysis

Should BTC fail to hold above $30,000, we can reasonably expect bears to attempt driving the price down to the 38.2% retracement, which sits at just over $24,000. But even if it gets there, I wouldn’t exactly load the boat with cryptocurrencies.

That’s because if you consider the history of Bitcoin’s chart action, BTC consistently breaks below the 38.2% retracement down to the 23.6% level. Intriguingly, the latter’s retracement puts BTC just $50 below $15,000, which is a price point I warned the investment community to be aware of back on June 29.

Indeed, on Blockster.com, I’m on record in May saying that investors should be prepared for a correction in the Bitcoin price, using market mathematics as a guiding principle. Personally, the value of an analyst is not just about pointing prospective buyers to upside opportunities but also warning them about downside risks.

And the biggest risk of all is that BTC tends to drop even lower than the 23.6% retracement. Therefore, it’s possible that we could see Bitcoin at $10,000 (or maybe a hair lower) before the bearishness hits a bottom.

Moving Forward in the Mess

While the above assessment may sound discouraging, in reality, this may be one of the greatest opportunities for patient investors. Please understand that no matter what happens on a day-to-day basis, the underlying blockchain technology is likely not going anywhere.

As we Americans like to say, the cat is out of the bag.

But it’s evident that in order for Bitcoin to reach the next level – the six-digit price – it needs to build foundational support at five-digit prices. Therefore, consider the ensuing downside as an opportunity to gradually build your digital portfolio.

Disclosure: The author held a long position in BTC.

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