In a mid-March 2024 Barchart article, I wrote:
In all markets, trends are your best friends until they bend. However, bulls and bears using discipline and plans for trading and investing tend to achieve long-term success, while ignoring risks can lead to financial disaster. While there are many stories of fantastic riches in the crypto asset class over the past years, there have also been devasting losses. The music continues to blast in cryptos, but when it stops and prices correct lower, latecomers could be left holding costly tokens with massive mark-to-market losses. Be careful in cryptos, as the most significant threat will come from government regulations and potential bans if the market cap continues to rise. Governments will not give up control of the money supply without a fight.
Like any investment or trade, careful attention to risk-reward dynamics is critical. More volatile assets require significant discipline. When it comes to volatility, Bitcoin and cryptos have displayed unprecedented price variance, which is not likely to end any time soon. Meanwhile, over the past weeks in Q1 2024, this week’s lows in Bitcoin continue to be last week’s highs.
Spot Bitcoin was trading at the $66,937.40 level on March 18, 2024, after rising to a $73,662.76 high on March 14. Bitcoin has not made a higher high since March 14, but the price has consolidated at mostly over $60,000.
Sideways to bearish trading in Bitcoin
After reaching the latest record peak, Bitcoin corrected and has been trading in a consolidation pattern with a bearish bias.
The chart underscores the importance of Bitcoin's current trading range, which has been mostly between $60,000 and $70,000 since its last high on March 14, 2024. This bearish range pattern, coupled with Bitcoin's leading position in the cryptocurrency market with a $1.214 trillion market cap at the $61,689.03 level, reflects around 53.2% of the cryptocurrency asset class's total $2.28 trillion valuation.
Spot Ethereum ETFs could be on the horizon
Over the past years, Bitcoin and other cryptocurrencies have reached highs on significant market events. In late 2017, the introduction of Bitcoin futures on the Chicago Mercantile Exchange caused the rally to a new peak. In 2021 the pandemic caused ordinary investors to flock to the rising Bitcoin market. When Elon Musk walked back Tesla’s commitment to accept Bitcoin as payment, the price fell. The latest rally to $73,662.76 occurred as the SEC approved spot Bitcoin ETF products, expanding the leading crypto currency’s addressable market. Investors flocked to the ETFs available in standard stock market accounts and eliminated the need for computer wallets or owning Bitcoin on exchanges. The 2014 Mount Gox scandal and the 2023 FTX failure made investors and traders skittish about holding Bitcoin and other crypto on exchanges. Spot Bitcoin ETFs eliminated the risk, causing capital to flow to the market, pushing the crypto to a new record high.
The next significant market event could be the SEC approval for a spot Ethereum ETF product. However, the market may have to wait for the regulator, as U.S. issuers and other firms expect the SEC to delay or deny the applications.
While it may take a while, Bitcoin paved the way for a spot Ethereum ETF as it is the second-leading crypto with a $366.5 billion market cap, reflecting 16.1% of the asset class. Bitcoin, Ethereum, and Tether are the only cryptos with market caps above the $100 billion level.
Bitcoin halving- What does it mean for the price?
In April 2024, the number of Bitcoin entering into circulation every ten minutes, or block rewards, will drop by half from 6.25 to 3.125 Bitcoin. The event happens every 210,000 blocks, approximately every four years, and has occurred three times since 2009, when Bitcoin burst onto the financial scene.
Bitcoin has a set supply schedule, which differs from fiat currencies where central banks can add or remove currency from circulation.
In theory, Bitcoin halving decreases supplies and should increase the price. Over the past years, prices have increased after halving. However, Bitcoin’s extreme volatility and significant speculative interest do not guarantee that the April 2024 halving or future halvings will lead to higher Bitcoin prices.
Expect explosive and implosive price action to continue
Before Bitcoin and cryptos came along, market participants seeking significant price volatility flocked to the commodities futures markets. Historically, commodities are far more volatile than stocks, bonds, currencies, and other asset classes. The futures arena only exacerbated the price variance as futures involved margin and leverage.
However, Bitcoin, Ethereum, and many other cryptocurrencies bursting on the financial scene over the past years only turbocharge the options for traders and speculators seeking wild price variance. While increased participation could dampen some of the price volatility, expect the boom-and-bust price action to continue. Fear and greed drive market prices higher and lower. When Bitcoin is in rally mode, trend-following speculators will hop on board the bullish trend. When the trend bends and turns lower, expect a herd of market participants to scurry for an exit to risk positions. Explosive rallies and implosive corrections have dominated Bitcoin and cryptocurrencies over the past years, and the odds favor a continuation of similar price action.
High volatility requires risk-reward discipline
Volatility is a nightmare for passive investors, but it creates a paradise of opportunities for nimble traders and investors with their fingers on the pulse of markets. Trading Bitcoin based on technical trend-following factors is attractive in hindsight because bullish and bearish trends can last for long periods. However, the daily price swings make Bitcoin a product not suited for the faint of heart.
Any risk position in Bitcoin, Ethereum, or any volatile asset requires a well-defined risk-reward plan, including profit and loss tolerance. While it is reasonable to adjust profit targets when a market moves in the anticipated direction, loss tolerance is a different story. Stops are crucial to protect capital and prevent a small disciplined loss from turning into a significant and devastating one. When adjusting profit horizons higher, stop levels should be proportionally adjusted to preserve profits and capital.
Always remember that your risk position is long or short at the current market price, not at the original execution price. Bitcoin, Ethereum, and cryptos are exciting assets, but their volatility means that discipline is critical for success. Only invest what you are willing to lose because the potential for substantial profits comes with the risk of commensurate losses.
New highs in Bitcoin are possible, but so are the odds of another implosive correction.
On the date of publication, Andrew Hecht did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
