For the first time in what feels like ages, bitcoin (BTC) has managed to break out from the sideways channel it has been relentlessly stuck in.
At the time of writing, BTC is touching six-week highs of US$20,622.
Strong gains can be observed on the one-hour BTC chart – Source: currency.com
This mid-single-digit rally effectively wiped out over US$550mln worth of short-BTC positions, with Ethereum’s adjacent rally hitting short sellers from another direction.
This brings some hope for long-term investors who have seen their crypto portfolios stagnate, but investors looking to jump in now should bear a few things in mind.
Speaking of bears.
Is it a bear trap?
A bear trap occurs when an asset in a long-tail downtrend enjoys a short relief rally before resuming its downtrend.
Investors who open a long position on a bear trap find themselves buying into a bearish asset, thus incurring losses.
The question is, then: Is bitcoin currently in a bear trap?
Taking the bull's defence is Jonathan Hobbs, crypto analyst at retail investment hub Finimize.
In Hobbs’ view: “Bitcoin’s volatility has been near record lows for the past month, and is only now starting to expand. This suggests we’re now at the early stages of a major macro move for bitcoin going into the end of the year.
“Looking at recent price action, bitcoin has now reclaimed the key psychological level of $20,000. So long as we’re still above $20,000 at the end of this week, I think a bear trap is less likely, and we could see the move come to the upside.”
Hobbs continued: “Bitcoin has been stuck in a tight range between about US$18,000 and US$25,000 since June which has given big market players enough time to accumulate positions in size.
“So assuming this isn’t a bear trap, there would be more than enough firepower to push the price well above the top of the range if it gets there.”
But the rally is not without its contradictions.
The correlation between bitcoin and big tech
This week’s mass round of big-tech earnings has so far been disappointing.
Alphabet (NASDAQ:GOOGL) and Microsoft (NASDAQ:MSFT) shares both tumbled over 7.5% on weak revenue guidance and Apple (NASDAQ:AAPL) dropped over 1.5%.
That matters, because there is a commonly held belief that bitcoin is highly correlative to large-cap tech stocks (i.e. the S&P index and bitcoin experience the same price swings).
However, beliefs are not always based on fact, and there is plenty of data to cast doubt on BTC/SPX correlation.
In reality, correlation has tightened and loosened over the years; so much so, that one wonders if it was all just confirmation bias in the first place.
You can make your own mind up with the below chart.
Bearing in mind that ‘1’ is full correlation and ‘-1’ is the opposite, it is clear that price correlation fluctuates considerably over time, making any clear trend at the very least debatable.
This is all just a roundabout way of telling you to stop using the traditional markets to speculate on bitcoin’s future price action.
So what can you use?
The US economy has been running red hot, and the Federal Reserve has been forced into a hawkish position with continual interest rate hikes to get a handle on inflation.
Simply put: Investors have been piling into the US dollar over pretty much any other asset class.
But there are signs that the dollar could be unwinding with a softening of US economic data.
If investors are more willing to take on risk when faced with a weaker greenback, Hobbs reckons “that should be good news for bitcoin bulls”.
Or maybe that is just a case of the popular “Uptober” meme, which portends that bitcoin usually rallies in October regardless of external influences.
The meme is partially justified: Bitcoin enjoyed its greatest rally of all time last “Uptober”, soaring to record highs of close to US$69,000 when November rolled around.
But we all know what happened after that spectacular time (in case you forgot: A two-trillion-dollar market rout).
Moral of the story: Plot your own position, justify it, and hedge yourself appropriately.
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