Crashing Gradually, Then Suddenly

By now, you have likely been inundated with headlines about today’s cryptocurrency crash. As with many events of this type, the move in bitcoin is best summed up by paraphrasing Hemingway: “Gradually, then suddenly”.[1]

On Monday, we wrote: “The 200 day moving average of bitcoin is in the 39,000 – 40,000 level. Let’s see if we test that range in the coming days and whether we see tweets that support a bounce if we get there.” We made that statement because bitcoin had already been rolling over and in a bit of a short-term downtrend after moving more or less sideways for the prior few weeks. Think of it this way, we don’t usually concern ourselves with downside support levels unless the product in question is in danger of testing them. We had been writing at length about the cracks that had begun to form in bitcoin’s narrative, most recently about our skepticism that climate worries were the true reason for Tesla’s (TSLA) abrupt turnaround on accepting bitcoin as payment.

The proximate reason for today’s drop was a range of news reports that China was cracking down further on cryptocurrencies. This should have surprised no one. The Chinese government has never been a fan of bitcoin. Cryptocurrencies are antithetical to a centrally controlled system, and the Chinese government has not been shy about exercising its influence over financial entities that attempt to flout its rules. Yet another piece of negative news was exactly what the crypto markets did not need at this time. A healthy market takes bad news relatively in stride. An unhealthy market reacts poorly to bad news. Bitcoin received the news while in a tenuous situation.

While we were correct in raising the possibility that Bitcoin would test its 200-day moving average, it was stunning to see how quickly that test failed. The following chart tells the story better than I can. The moving average support was pierced, and bitcoin quickly plunged to the 30,000 level that proved to be support earlier this year. That represented about a 30% plunge on the day, so it was not surprising to see bargain hunting at that level:

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Disclosure: PENNY STOCKS

Low priced microcap securities (also know as “Penny Stocks”) represent low priced shares of small companies typically not traded or quoted on an ...

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