Media outlets scrambled to find an explanation for bitcoin’s surge above $40,000 yesterday, settling on a dubious article in City AM, a free London newspaper, which quoted an unidentified “insider” at Amazon
as saying that the online retailer was “ready to roll” with bitcoin as a payment method.
Soon after, the same outlets blamed a moderate pullback in price to below $37,000 on Amazon’s denial of the story, which it said was “speculation” and “not true”.
Attempts by journalists to find causes for bitcoin’s short-term price action are nothing new–and they’re almost always misguided.
Last month, for example, news organisations jumped on a June 14th report by Reuters claiming that bitcoin rose “more than 9% after” Tesla
billionaire Elon Musk tweeted that the carmaker might end its suspension of bitcoin payments. That was inaccurate: the cryptocurrency moved just 5.4% after Musk’s tweet at 17:42 GMT, having already begun an upward swing two hours prior to his remarks.
Reuters corrected this error after I pointed it out to the article’s authors, but no other news outlets amended their repetition of the mistake.
I bring this up not to criticize Reuters for its otherwise superb standards of news reporting; nor to discredit any of the media companies that are trying in vain to explain bitcoin’s price action through news events.
Rather, I present this as an opportunity to show how bitcoin’s price swings are largely influenced by technical indicators–patterns and trends on charts–as opposed to fundamental events. That’s not to say that individuals, companies and governments don’t influence market sentiment. They clearly do. But their role in driving short-term price movements is generally overstated by journalists who are trying to find simple narratives for a complex asset class.
Let’s start by looking at a timeline of the Amazon story and placing it side-by-side with the raw price data.
On July 23rd, Coindesk reported that Amazon had posted a job advert for a “digital currency and blockchain product lead”–a newly created role that, understandably, fueled speculation of a possible move by the company into cryptocurrency. Bitcoin appreciated 4.2% that day, closing at $33,684, according to the Bitstamp exchange. However, it had also risen in the two days prior to the report–including a larger 7.9% jump on July 21st–suggesting that an up-trend was already in force.
Bitcoin continued appreciating over the next three days, culminating in a 14.5% intra-day high of $40,581 on July 26th–the day that City AM’s article was published. That was later pared back to a 5.3% gain following a drawdown in the evening.
At first glance, it’s tempting to attribute Monday’s sharp spike to the London newspaper’s report. Likewise, Amazon’s denial on the evening of July 26th appears to coincide with the pullback below $37,000.
Look at the daily chart, however, and a very different picture emerges:
The chart shows, in visual form, that bitcoin’s short-term up-trend started before Amazon’s job advert was publicised. Importantly, the pace of the trend does not appear to have been impacted by the subsequent news coverage.
So what caused this sudden surge on July 21st, and why did price overshoot and correct on July 26th?
The answer can be found in an article I published in late June, in which I drew attention to a downward sloping trendline (blue line) that had by that stage rejected price to the downside on six occasions. I noted at the time: “Trendlines act as support and resistance levels once widely recognized by traders, creating either a floor for price-action recovery or a ceiling for downward momentum to resume.”
Bitcoin moved above the trendline shortly after the article was published, turning it from a resistance level into a support level. It then shadowed the trendline for three weeks, strengthening its support and building momentum for the July 21st rally.
What about the Monday evening pullback from $40,581?
Again, the charts tell all. My earlier article used the 4hr chart to identify two resistance levels above the trendline that would need to be overcome if any rally was to be sustained: the 144 and the 200 exponential moving averages. Surpassing both these levels, I wrote, would pave “the way for a rapid rise to $41,000, which has marked a local top twice since May”.
In the end, price came within 1% of my target. And the same two exponential moving averages on a different timeframe–the 144-day (pink line) and the 200-day (green line)–marked the July 26th top.
For many bitcoin enthusiasts–particularly those who have no intention of selling–technical analysis is a fanciful exercise devoid of any merit. They are entitled to their opinion. But the reality is that most traders use indicators (such as exponential moving averages) and patterns (such as trendlines) to time their entry and exit in the market. This creates a loose consensus in the market, giving rise to clusters of orders around levels of widely perceived support and resistance.
Once maintained or broken, these levels trigger cascading buying and selling that helps the market find direction.
Few mainstream journalists understand technical analysis, and still fewer truly understand bitcoin. So it’s not surprising that news outlets prefer to push more gratifying stories about Amazon, Tesla, the Chinese government, U.S. regulators and other phantom causes.
They are generally wrong to do so. At most, last week’s Amazon story gave market participants an excuse to test the limits of an up-trend that was already in full-swing.
It’s important to acknowledge that significant, credible news about corporate adoption will, of course, impact bitcoin’s short-term price. Tesla demonstrated this in dramatic fashion in February, when Musk announced the purchase of $1.5bn worth of bitcoin; and again in May, when he temporarily stopped accepting payments for vehicles in bitcoin over environmental concerns. Government actions also have the potential to impact short-term price.
Zoom out, however, and these events are mere blips in the higher-timeframe up-trend that has steered bitcoin since its inception 12 years ago.
Why is it rising? Because it’s the best opportunity society has to create a global digital currency that’s accessible to all and not vulnerable to government or central bank manipulation. In the long-term, bitcoin doesn’t give a damn about Amazon’s job postings or the Tesla CEO’s moodswings.