Bitcoin is anything but simple.
It’s a digital currency which means there are no physical coins or bills. It’s a decentralized currency which means a central bank doesn’t control it.
In some ways, this all indicates bitcoin has no value. Warren Buffett agrees with that assessment. He once said:
The U.S. dollar is able to store value, but Bitcoin is not capable of doing so, and therefore it’s not different from a seashell.
But that’s not true. Anything can have value. On the Pacific island of Yap, large limestone discs weighing hundreds of tons serve as currency. These boulders have value because everyone on Yap agrees they do.
Bitcoin has value because people agree it has value. Their opinion of its value changes frequently, which makes bitcoin ideal for trading.
Bitcoin is backing off recent highs and bargain hunters could be buyers. The chart below shows bitcoin prices with a technical indicator known as stochastics at the bottom.
Bitcoin’s Price Is Trending Down
Source: Symbolik
Using Technical Analysis to Trade Bitcoin
In this chart, the stochastics indicator provides a buy signal when the black line crosses above the red line. When the red line falls below the black line, the indicator gives a sell signal. Tests show that stochastics beats buy-and-hold strategies for bitcoin.
In fact, several studies have demonstrated that simple technical strategies can beat buy-and-hold returns in crypto markets. One major reason for outperformance is because technical strategies avoid some of the large price declines that occur in downtrends.
While bargain hunters might think declines are buying opportunities, they might find more success with simple technical rules. A moving average or a simple stochastics indicator is another way to trade the market.
Of course, there are many cryptocurrencies. A trader could apply this strategy to several of them. It is possible traders could find a place for cryptos in their portfolios just like stocks.
Michael Carr is a Chartered Market Technician for Banyan Hill Publishing and the Editor of One Trade, Peak Velocity Trader and Precision Profits. He teaches technical analysis and quantitative technical analysis at New York Institute of Finance. Mr. Carr also is the former editor of the CMT Association newsletter Technically Speaking.
Follow him on Twitter @MichaelCarrGuru.