There was a panic as Bitcoin and other cryptocurrencies began to plunge as we moved into the weekend heralding Christmas in 2017. This is part 2 of a Bitcoin series. If you have not read it yet, the trades taken during the Bitcoin campaign are shown here:

With a trading campaign fully loaded up, I was ignoring most of the cries of “Bubble!” that pervaded the marketplace. The charts would tell me how to react, and it was beginning to tell me something slightly worrying. In Figure 1 below, the first sign of trouble was the fact that volume was beginning to decline, in spite of the rapid rise of Bitcoin. This meant that each successive giddy high was demonstrating less and less participation.

18th December 2017 Bitcoin Volume Divergence

Figure 1: Volume Divergence and Stop Trails

A person with an extremely heavy position would take the divergence itself as a sign to begin to unload. I considered the trading position small enough that it was insufficient to justify this. In addition, it was being funded entirely by market profits, so it made sense to see how far this balloon would rise. Nonetheless, stop losses were being carefully planned.

The general idea was that as prices had risen to such profitable levels, it was reasonable to give back 25% of the maximum paper profit. Although might seem a lot, it was a good bargain in exchange for the potential to ride a wave up to the moon, remote though that seemed. Talking heads from various quarters were either touting or reviling Bitcoin, and I was determined to ignore their opinions in favour of what the market told me.

More disturbingly, I was beginning to notice increasing advertisements and marketing materials from Bitcoin gurus. Whereas up till now there had been relatively mixed opinions on cryptocurrencies in general in my circle, the mood was beginning to turn from extreme scepticism to uncertain regret at missing the boat. Both these events indicated that we were approaching bubble danger territory. It is a fairly reliable dictum that a market becomes infinitely more dangerous when it becomes profitable enough for gurus to emerge.

Someone else who might have had better fortune and foresight than me to have entered the Bitcoin game earlier might have chosen to trail their stops on any of the trendlines indicated in Figure 1. The game was on!

Good trading!

Kaye Lee
Head Trader Consultant