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What Matters More for Bitcoin Trading: Technicals, Fundamentals, Structural Role?

What Matters More for Bitcoin Trading: Technicals, Fundamentals, Structural Role?

John Kicklighter, Chief Strategist

Talking Points:

  • Bitcoin (BTC/USD) has seen extraordinary volatility over the past weeks - comparable to its extreme 2013 activity
  • Key technical levels between trendlines and the previous record high near 1160 seem close at hand
  • The cryptocurrency's role and use as means to circumvent capital controls will dictate trade and offers a valuable signal

What are the DailyFX analysts' top trading ideas for 2017 and key lessons to take away from 2016? Sign up for both on the DailyFX Trading Guides page.

Though we are less than three full weeks into 2017, we have already experienced a considerable amount of volatility around the financial market. One of the most market-moving assets is the increasingly popular Bitcoin (BTC/USD). The cryptocurrency had charged higher through the end of 2016 and nearly reached the record high set in 2016. Yet, before the milestone could be met and surpassed, the bullish momentum completely dried up. What followed was the most aggressive dive in two years and total loss of nearly a third of its value in two weeks’ time. The remnants of this extreme volatility are a broad range of technical levels - but the sway they have over the market will depend on the level of activity that remains.

Amplitude in market swings will have a lot to do with fundamentals moving forward. For this most recent build up and collapse, the motivation was the correlation to the Chinese Yuan. The burgeoning currency was sliding steadily through the end of 2016 to hit a record low (via the offshore CNH). When officials stepped in to halt the currency's slide in order to break a growing belief that capital was fleeing the country, the resultant USD/CNH translated directly into a USD/BTC tumble. The connection is founded through the digital currency's position in the global web as an outlet for funds that may otherwise be battered by policy programs like stimulus or diverted through means like capital controls. This ability to circumvent authority curbs on cross border capital flows represents the alternative currency's primary appeal in current conditions.

The direction and pace Bitcoin manages moving forward will be tied to this primary fundamental role. If there is another concerted effort to stop open capital flows over a major financial border, investors will once again turn to this liquid alternative in masse. In its first major climb in 2013, the definitive event was Cyprus's turn with the European financial crisis and subsequent effort to halt foreign repatriation. This most recent iteration was clearly a reaction to the developments in China, but efforts to close that open channel is likely to undermine its contribution to Bitcoin volatility again in the future. Volatility will determine the efficacy of technicals. That activity level will depend on another flight of capital. Even if you don't trade Bitcoin, keeping tabs on its activities can offer a crucial read on the broader market. We discuss trading and analyzing Bitcoin in today's Strategy Video.

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.