Bitcoin Attacks ~30,000/BT, Fulfilling Projected Plunge. What Next?
05/19/21 Weekly Re-Lay Alert – “Rock, Paper, Scissors (Bitcoin Bubble?) & 4WoLD”
Currency Wars Heat Up
Once again, the three primary ‘currencies’ – roughly categorized by fiat (paper, debt-backed), hard (metals) and digital (cryptos) – are swinging in close synchronicity when viewed from a broader vantagepoint.
Over the past several years, this overall perspective has been described using two analogies. The first is viewing the battle between the Dollar, Gold & Bitcoin (crypto-currency) like a game of ‘Rock, Paper, Scissors’ where only one of the three can have a major rally at a time. Often one is sitting on the sidelines (in congestion or trading sideways) while the other two battle it out.
In many ways, it is a three-way battle for currency supremacy… although there are many nuances that need to also be considered.
The second analogy is that of an algebraic equation of ‘a x b = c’ where each factor needs to be adjusted – up or down – when one of the others is moving in a convincing trend.
(The ‘=’ or equal sign demands this. If you had an equation where a = b and you multiplied the ‘a’ side by 3, you must also multiple the ‘b’ side by 3 to maintain its ‘equal’ status… otherwise, it is not an equation.)
While not a perfect analogy, try to view the battle between the Dollar and its alternatives in this type of scenario. For this example (for illustrative purposes only), the Dollar is given a value range of 1 – 10. As a result, the product of its competitors must also equal 1 – 10 (when they are multiplied together), depending on the Dollar’s trend.
A powerful trend would be a 10, while a congested, non-existent (sideways) trend would be a 1… and so on. The direction of that trend must also be factored in since the market in the strongest trend is usually trading inversely to both the other ‘currencies’.
So, if cryptocurrency takes off and is basically a 10, and the Dollar is dropping sharply (also a 10), then Gold must only be a 1 (10 x 1 = 10).
If Gold began to move toward a 4 as the Dollar was still in a solid downtrend, cryptos would have to scale back to a 2.5 (4 x 2.5 = 10)… and so on. (And, yes, this analogy also falters in some key aspects.)
Except in a case where the Dollar is in an all-out freefall, Gold & cryptocurrency would be in competition for the attention of anti-Dollar investment funds.
This is a good time to reiterate – this analogy is only for illustrative purposes and is not a perfect science. More than anything, its discussion is to challenge those that mistakenly believe there is a consistent correlation or inverse correlation between any two of these factors.
In the first quarter of 2021, Bitcoin surged – keeping a lid on rallies in Gold and the Dollar. In April, however, the Dollar & Bitcoin plateaued as Gold bottomed. The Dollar began to sell off and then Bitcoin followed suit – leaving a window of opportunity for Gold to rally during the precise time (April/May ’21) that cycles have projected for many months. That is what has transpired.
Today’s action was another perfect example of this algebraic relationship.
The Dollar was slightly down and gold slightly up as Bitcoin began to plunge. Very quickly, the Dollar & Gold spiked higher – again confounding the traders that insist the Dollar & Gold must trade in opposite directions.
By the end of the day, Bitcoin had recovered but was still down ~10% for the day… prompting the Dollar & Gold to pull back from their highs. This also brings to mind the Axiom on Market Correlation, reprinted above.
In this case, Bitcoin was accelerating to the downside (in an ‘extreme phase’) – suddenly spurring the Dollar & Gold to trade in opposition to it… in a very synchronized manner. Some days – when none of the three are in a very strong trend, up or down – the correlation is completely indetectable and could sway from hour to hour or day to day. It is only when one of the three draws a great deal of focus to itself – that the other two will move in close opposition to it.
There are other factors as well and I repeatedly warn AGAINST trading any market based solely on correlations or expected correlations. Each market has its own governing factors and fundamentals as well. And the peaks and troughs rarely occur at the exact same time.
This discussion is to reinforce a pair of important principles in the markets… that can then be applied to hone related analysis. On to that analysis…
Bitcoin fulfilled about 97% of the downside expectations it triggered when it fulfilled its major upside target at ~65,000/BT and signaled that a ‘5th’ wave peak was likely. That was projected to trigger a sharp plunge back toward ~29,000/BT – the 4th wave of lesser degree support (and the 2021 intra-year low and support).”
Bitcoin has, for all intents and purposes, fulfilled ongoing analysis for a plunge below 30,000/BT after it previously fulfilled early-2021 projections for a surge to ~65,000/BT, where a higher-magnitude ‘III’ (3) wave was expected to peak and complete the parabolic phase of Bitcoin’s advance. (A corresponding ‘V’ wave peak could later retest or spike above that ‘III’ wave top.)
That was forecast to trigger a drop back to ~29,000/BT – its 4th wave of lesser degree support and what is now considered the most decisive level of 6 – 12 month and 1 – 2 year support. If it can hold that downside target in the coming months, Bitcoin would likely set a 3 – 6 month bottom near there.
What could 2021/2022 outlook for Dollar & Gold mean for the future of cryptos?
Refer to latest Weekly Re-Lay & INSIIDE Track publications for additional details and/or related trading strategies.