Bitcoin Tests Retracement

The CFTC is moving to grant another license to a cryptocurrency derivative exchange. On Business Insider, we read:

While most federal regulators in the US have taken a sluggish approach to cryptocurrencies, the Commodity Futures Trading Commission (CFTC) has been an exception. In September 2015, the body designated cryptocurrencies as commodities, rather than currencies.

Then, in May 2016, it gave TeraExchange, a cryptocurrency clearing platform, full authorization to trade digital currency derivatives, making it the first company in the US to receive such permission. Now, the CFTC has granted the same permission to another player, LedgerX, a cryptocurrency trading and clearing platform for institutional investors. The CFTC's decision to approve a second such company suggests it may license more players going forward.

It's worth noting the CFTC may find it easier than other federal agencies to deal with cryptocurrencies. The CFTC's mandate covers all forms of trades and bets made on the future performance of a commodity, regardless of what it may be, so by classifying cryptocurrencies under this umbrella term, it can apply its existing regulatory framework to the asset class. The CFTC is therefore in a position to license firms like LedgerX because they handle only trades, swaps, and derivatives based on cryptocurrency movements, rather than the assets directly. In contrast, regulators that actually handle the purchase and sale of assets, such as the Securities and Exchange Commission (SEC), may find it harder to fit cryptocurrencies into their current taxonomy.

This is a sign that there’s a lot of interest in Bitcoin. It might make it easier for investors and traders to short Bitcoin, which hasn’t been very easy so far. At the same time, we don’t expect this trend to change. It is quite possible that other Bitcoin derivatives exchanges are going to apply to the CFTC for such permission. So, in our opinion, we are likely to see more derivatives exchanges in the years to come. On a tangent, the fact that new Bitcoin-related exchanges are approved might be a sign of a peak in the interest.

Bitcoin Declines

On BitStamp, we saw Bitcoin fluctuate in the last couple of days on relatively thin volume. In our previous commentary, we wrote:

The general comment here is that we have basically seen no change in the short-term situation. Most importantly, Bitcoin is above the 23.6% and (obviously) 38.2% retracement levels. The second level is mentioned here as it is most likely the level at which we would consider the situation to tilt to bearish (unless we see a strong move above the all-time high earlier, that is).

This remains unchanged. Bitcoin is still very close to $2,500, slightly above this level on several major exchanges. So, we have neither seen a substantial move down, nor up. Bitcoin has been consolidating for some time now and the next move might have major implications but we simply haven’t seen this yet.

Bitcoin is still above $2,500, closer to $2,600 but the volume hasn’t been particularly strong. In this light, the situation is still very much the way it was when we sent out our previous alert. Bitcoin is in a consolidation mode. It is totally conceivable that the currency could move to the recent all-time high from here. At the same time, we’re not seeing this move just now.

The only change we have seen so far (this is written around 11:30a.m. ET) is the decline today. So far, Bitcoin hasn’t decisively broken down below the $2,400 level. However, we’ve seen a move below the 23.6% retracement level (at $2,487). What might this mean? Our take is that this might be the first part of the beginning of a decline. The move hasn’t been confirmed yet, though.

More Bearish Picture

On the long-term BTC-e chart, we see that Bitcoin has come down from the all-time high around $2,900. In our previous alert, we wrote:

The 23.6% retracement level hasn’t been broken. Actually, since the all-time high we have seen about three serious attempts to break below this level (depending on how you count). All of them have failed. This suggests that there might be more strength in the market. At the same time, the 23.6% level is still very close which makes the situation risky as only a relatively small move down could turn the situation on its head. (…)

We see a move below the 23.6% retracement level ($2,415). This is the first level that might trigger a much more serious decline, in our opinion. At the same time, the breakdown is not confirmed at the moment of writing these words and the volume on which the move has been unwinding hasn’t been particularly strong. All this means that we might actually be in the first stage of a significant slump. On the other hand, the risk of a bounce back to the upside is quite considerable. If we see a confirmed move down below 23.6%, we might have a shorting opportunity on our hands. This is not automatic.

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Thank you.

Regards,

Mike McAra
Bitcoin Trading Strategist
Bitcoin Trading Alerts