Bitcoin price is falling: causes of the decline

2018 was not a successful year for holders of virtual currencies, and Bitcoin has been falling so far. At the end of last year, cryptocurrency prices reached historic highs, but since then a downtrend has dominated. The price of Bitcoin has fallen by around 73%, but the performance of the most important virtual currency was still among the best in the sector. Other coins, including well-known ones such as Ethereum, Dash, and Litecoin, suffered sharper declines, losing around 90%. In this situation, should investors be interested in the possibility of making money from both rises and falls in virtual currency market prices?

The 6000-dollar level was broken. Could this represent the capitulation of crypto enthusiasts?

We must acknowledge that in 2018 interest in this market was on a downward path, just like the price of Bitcoin. The last upward move in prices was recorded in July, but it proved to be a failure. On the other hand, for a long period of time, the 6000-dollar level acted as a “lifeline” for the price of Bitcoin: it did not rise much, but it also failed to break that level. It seemed that investors would not accept a lower price. However, the downward move was triggered by apparently minor information: the split of the Bitcoin Cash network. Indeed, the price of Bitcoin Cash itself collapsed, but Bitcoin and other coins had been affected by much more unfavorable news in the past, such as hacker attacks. In any case, the BTC price fell far below 6000 dollars and recently broke the 4000-dollar threshold, confirming the emergence of a broad downtrend. Bitcoin

Bitcoin is falling. What does technical analysis tell us in this case?

It may sound ironic, but by breaking such an important level and producing a textbook reaction, the Bitcoin market seems to have confirmed its maturity. The formation of such a pattern on the chart is important for investors: support and resistance areas are basic information for traders who use technical analysis. They expect that, after the price comes into contact with these levels, appropriate reactions will occur. Recently, the price of Bitcoin has repeatedly accepted the direction determined by technical analysis. A clear example is the correction after the break below the 6000-dollar level. Investors can benefit from the price decline by using CFD instruments . It should be remembered that the data presented refer to past performance and are not a reliable indicator of future performance. In 2017 it was often suggested that the price movements of virtual currencies, including Bitcoin, could not be interpreted according to the principles of technical analysis. Support or resistance zones, price formations, and candlestick patterns seemed to be techniques that could not be applied to these instruments. The direction of the price was clearly unpredictable, suggesting the extremely volatile nature of this market. Recently, some investors, those attracted by the rises, have left the market, leaving behind a calmer state. Still, price movements can be stronger than those in the stock or FX markets, but they have become more systematic. For an investor who uses technical analysis, the direction in which the price tends to move is of secondary importance. Most formations are effective both when prices rise and when they fall. It is important to have the opportunity to profit from any movement that seems appropriate.

Futures market or CFDs - which should we choose?

When interest in virtual currencies was reaching its peak, there were repeated suggestions that the lack of short positions was distorting the price of Bitcoin and other coins. The reality is that, after futures contracts were introduced by CBOE and CME, prices rose dynamically for a while and shortly afterward reached their highs. However, it is possible that the moves were not directly correlated with the introduction of futures contracts, as these instruments do not attract a high level of interest because of numerous restrictions. Therefore, CFDs are of interest to investors who use strategies based on price movements. This type of instrument has many advantages. First of all, it offers the opportunity to open positions not only when prices rise, but also during downward moves. A short position can be profitable when Bitcoin or other virtual currencies depreciate.

Trade only through regulated brokers!

By working with a regulated broker that is financially stable, investors can make sure their funds are better protected than in an electronic wallet for virtual currencies (crypto wallet). ESMA regulations have reduced the amount of leverage available for virtual currencies, and investors now have access to leverage of 2:1. Therefore, opening a position with a nominal value of 10000 dollars requires an investment of 5000 dollars. It is important to note that, through contracts for difference (CFDs), investors can protect part of their cryptocurrency positions in their portfolios.

How will virtual currency prices evolve?

The virtual currency market has often been compared with the “dot-com” bubble, when prices of technology companies, which had experienced an unprecedented boom at the end of the 90s and another at the beginning of the 21st century, collapsed. Still, today we cannot imagine what the world would look like without the Internet. Many companies went bankrupt, but the technology branch enjoyed enormous success. Companies in this field are now leaders in the stock market. In the case of virtual currencies, we have left behind the dramatic decline from the end of last year, but we cannot know how the technology will be used. Will virtual currencies become a common payment method? Will people start using them? Will we be able to use Bitcoin as a payment method at a kiosk? It seems that the period of global acceptance of virtual currencies has not yet begun. This is why traders should make sure they can make money from price movements, whether upward or downward, or at least use them as a hedging method for coins held in electronic wallets (wallets).

Source: Przemysław Kwiecień CFA, PhD, Chief Economist XTB

Risk warning: This article is for information and education only, reflects the situation as of its publication date and does not constitute investment advice, an offer or a recommendation to buy or sell any financial instrument. Trading leveraged instruments (Forex, CFDs) and crypto-assets carries a high risk of losing your capital. Past performance does not guarantee future results. Before investing, assess your objectives and risk tolerance and, if needed, consult a licensed adviser. Details: Disclaimer & Risk Warning.