Expectations of China

24/04/2014

Since so many people are asking privately about my opinion of BTC/USD price direction so I thought I would write something for everyone.

This is my opinion, do with it what you please, but don't blame me for any losses you make: even with a precise prediction, it all depends on how and when you execute your trades and the condition of the market at that point.  For example you might not be able to liquidate or enter a position at the prices you need without affecting the market because the orderbook is to thin at your target level, or the volume is too low. And never forget black swan which can come right out of nowhere. I know lots of people who close positions too early or late or lose their bottle and take losses that would not have occurred if they had waited been more patient.

I will give you my opinion and some of the reasoning I have for coming to these conclusions.

As of writing, we are still in a bear trend. For me, the bear trend was confirmed at $850 after we slid down from 950. Uncertainty over China bans and restrictions on cryptocurrencies are still uncertain. Chinese investors are very easy to influence - give them a little good news (like an OKCoin ATM as announced on the 14th April) and they go on a spending spree, tell them a bank account has been closed and they can't sell fast enough, tell them you've activated a new recharge and off they go buying again. But the wiser investor will also realise whales use these news events as a distraction from their own machination (but that that is out of scope for this document).

So this is pretty much what we have seen. The latest China deadline expired (14/4) and first OKCoin released news, then BTCChina the following day and both events met with price rises. What you'll notice however is the momentum did not persist after the pump was priced in. This is because people are suspicious as hell deep down and these pumps are just a distraction. Let's face facts: prices from $1,163 all-the-way-down-to-the-gates-of-hell have been seen: flash crashes aside, we reached 340 and flash crashes included all the way down to $100 of Bitfinex and $102 on Btc-e. Please don't be an r/bitcoin redditor and say “oh, but this is actually good news” unless you have been trading this to accumulate your USD holdings all the way down.

Price targets? We can absolutely see 450 again. It's likely we will have to from a TA perspective. The other levels  to retest are ~400 and ~350 (all targets +/- $20). Failing that, $260 is quite possible. If that were to go we're in the mid hundreds (which is where I think BTC's real current value is). Where do these figures come from? Zoom out to 1d and you'll see them.

I would caution anyone thinking, "OK we're done with the bear run, full bull ahead" because that is frankly unrealistic. Even if we are at a turning point over the in the current $350-$450 range, we'll need to go through a LOT of consolidation and sideways movements to get market confidence back.

Think about an abused (non aggressive breed of) dog. Take a happy dog and beat it. It will cower and go to the corner. But as soon as you call it, it will come running back to you all happy and bouncy. You can repeat this quite a few times, until eventually, even if you call it back and offer it incentive (food) it will be highly suspicious and may just stay away. This is the Chinese investor right now. It's called de-sensitisation to market signals.

The only way abuse victims really recover is that over time, by not getting abused again they start to feel safe. Fortunately in the markets, that can happen a lot sooner than with physically abused humans.

Basically, the trend change can only come in earnest when we have a break from all these black swans: the market forgets quickly. In the absences of big price moving events, the market can happily test out new levels and gain confidence in a stable floor price. ~$400 was supposed to be that, but we broke it at $340 on the 14th. Because we touched $340 quite convincingly (only broken by a swan event, the OKCoin ATM confidence trick), I believe it is quite reasonable to touch that price again but only after really testing $400 (since that was more or less the floor for the last 4 months). TA is a self fulfilling prophecy. People see these floors and levels so they will naturally trade toward them. That is why, in retrospect, TA is always right, but not until you look at it (the cat in the box).

A word about China - if you are under any illusions about the effect of China on the BTC market, stop reading, sell and get out because there is no hope for you. Really, stop reading now because you are doomed.

The whole meteoric rise of bitcoin prices was absolutely, and only, down to China: there were plenty signals to demonstrate this connection including most interestingly the full node count in China which maps almost 1:1 to the price movement. During the bull run, no matter what bad news came from the west to flash crashed the price, China didn't care and everyone just saw the cheaper prices as an opportunity to buy more. Remember the Chinese are not like you my dear Western reader. They are conditioned to save. They live in a country with strict capital controls. So their only investment vehicle is property. Bitcoin provides both a promising investment and a way to get money out for the little guy). It's also a country where millions migrate to other countries and send remittances back to their families. If you are a westerner (EU, US, AU) then your culture is quite different to that of Asians (Spanish/Hispanic are quite similar in many ways though), don't ever make opinions about their mentality using your own world view because you will get burned.

That's why you always see me tweeting, “the market is always right”, and “never judge news on the reality, but how people perceive it”.

Now, you'll notice the price only goes up or down when there is news from China, with MtGox excepted for obvious reasons. I feel that MtGox would have had much less of an effect had the PBOC rulings not been made in December. Even the recent fake news released about Second Market opening their exchange had virtually no effect and neither has other big news from the west, even though clearly, there are big moves under way. Those items are only creating long term certainty for bitcoin but they are not enough to affect price movements now. China only needs to sneeze and the price will swing massively. My rule recently has been “when OKCoin LTC pumps, close your shorts (even at a loss) and go long”. Since the market is always right, remember, China, love it or hate it, matters a lot. Neither should you assume that things can settle down so easily - due to interdependence, so long as there is trading in China it has to affect BTC markets around the world (due to arbitrage).

There is also another adage, that to see a reversal, you probably need a dump. So I expect to see that. But more over, my guts tell me China is not done bashing the cryptoverse ;) I'm so confident about it that if we see a price rise above 500, I'm going short.

Caveats: Bitcoin is very difficult to predict unless you are looking at longer term trades and wide price point distribution, because the bitcoin market is especially sensitive to black swan events. Those are events that come that you could not predict (e.g. PBOC rulings). Sometimes you can be aware it's a dangerous time for black swans. One thing we know is that Huobi etc. are planning to go offshore. I am suspicious about how that can really work for the Chinese markets because of capital controls, but, like the ATM nonesense, it could be a huge rally point for the Chinese markets (and a great excuses for whales to pump). So all the way down, just remember how one of these can come along unexpected. Don't blame me for saying we're heading to $350 and on the way we spike to 500. Saying that, the biggest caveat is that we've not heard the last of Chinese regulation in the bitcoin space.  This especially affects margin traders with lower position to balance ratios since you can get squeezed out of our position quite easily. You have been warned.

This is why you should probably have been favouring fiat more than bitcoin over the last few months. My last advice is, if you are unsure, don't trade. There will always been the next opportunity and avoid opening positions in reaction to a price movement.

A word on the market manipulation we've been seeing too. Right now the market is being propped up. There is quite low volume but very little inclination to buy. That could signal a quick drop soon as the market gradually capitulates. That can also be a trap because whales know there is some news around the corner (the evidence of front running in BTC is higher than in the real world). So be careful around the 25th April – that's a Friday and that weekend might bring something unexpected. Beyond the scope of this document, but remember all BTC markets are now leveraged. Bitstamp is leveraged through Bitfinex. BTC-e is leveraged though MT4, and the Chinese markets are all pretty much leveraged too. That means buying sprees can be caused by too many people betting short and getting squeezed out of their positions. That is often the cause of sharp price rises and spikes after prices have been dropping for a while. It also explains why the buying dies out, because those positions are eventually squeezed out (people buying to cover their shorts, or getting liquidated in margin calls) and there are no real buyers. This can then cascade as market stop orders are triggered. This effect is leveraged in both directions by whales. This is why day trading is a dangerous game.

Long term outlook: I am long term bullish for bitcoin, so frankly, if you are able to buy and hold, anything between 350-450 is a good buy in my opinion, even if we go lower. If you are afraid of a reversal, you can start buying small amounts of BTC now and larger amounts the further we go down. BUT, only do this if you can really sit on the BTC because a new ATH could be several months away. If there is money you might need, keep it in dollars and better still, loan it out as margin swap at Bitfinex since you get good rates of interest 0.09%+ per day on USD is quite common.

If you don't use Bitfinex yet, you really are missing out. It combines the Bitstamp orderbook and their own to give the largest liquidity of all the exchanges, you can trade on margin up to 2.5:1 and earn money from offering liquidity swap (secured loans) which is great when you don't want to trade, but can still earn money (without the risks of trading).

So that's probably it for now. I recommend the Ethereum IPO when it comes out. Altcoins, if you have the balls and connections, can be the best way to increase your BTC holding, but, also the quickest way to visit zero. I'm loving the mintpal.com exchange.

All the best, and happy trading.

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