Are Bitcoin Chart Patterns Accurate?

One of the features of Binance.com is their Charts of the Week. They recently noted an indecisive chart pattern for Bitcoin. Our concern is this. Are Bitcoin chart patterns accurate or does the issue of Bitcoin wash trading totally gum up the predictive value of technical indicators for trading Bitcoin? Those who invest and trade across various markets commonly use both fundamental and technical signals to guide their actions. Bitcoin’s sole fundamental is that it has an eventual limit on how many will be mined. It does, however, tend to track up and down with the Nasdaq stock market over time. That leaves a trader with technical indicators for predicting Bitcoin price direction and we have some concerns in that regard.

What Binance Says About Bitcoin Charts Today

The Binance.com article notes that the price of Bitcoin fell somewhat and was having trouble getting over the 50-hour moving average. It was also producing a symmetrical triangle on the twelve-hour chart. And open interest on Bitcoin call options at $40,000 is up.  What do these indicators mean for someone trading Bitcoin?

What Is a Moving Average?

Anyone who follows stocks, commodities, currencies, or cryptocurrencies knows that prices tend to fluctuate up and down throughout the day, week, and month. They do this even though the average price might not change all that much. In order to get a clearer idea of whether or not there is a trend in the price of Bitcoin, the S&P 500, or the price of crude oil, a trader can use a moving average. This is the sum of prices over the preceding hours or days divided by the number of days involved such as 50 for a 50-day or 50-hour moving average. The moving average is recalculated for each successive time period. This is a way of getting rid of the “static” of daily market fluctuations. Moving averages often represent barriers in trading where a price will approach and then bounce back. When a price moves through a moving average that often indicates a new trend.

Why Is a Symmetric Triangle Important for Bitcoin Trading?

A symmetrical triangle on a trading chart generally indicates that the price of the traded entity is consolidating. It often precedes a breakout from the current price trend but does not generally indicate whether the breakup will be upward or downward.

What Is Open Interest in Trading Bitcoin?

Open interest is the amount of money coming into the options or futures market for a traded entity like Bitcoin. Higher open interest on Bitcoin calls indicates that options trades expect the cryptocurrency to go up in price and higher open interest in puts indicates that Bitcoin traders expect the price to go down. And when open interest falls for either calls or puts it generally indicates that options traders do not expect the market to move very much.

Bitcoin Charts Are Currently Indecisive

The point made in the Binance.com article is that open interest, the 50-hour moving average and a symmetrical triangle taken together do not give a good indication of where Bitcoin is going next. The fact that there is an eventual limit to the number of Bitcoin is of no use in the near term. The Nasdaq is slowly edging upward as traders are banking on the Fed not raising interest rates as aggressively as in 2022.

Concerns Regarding Accuracy of Bitcoin Charts

Our specific worry with Bitcoin is the very high amount of wash trading. Wash trading is when a trader simultaneously sells and repurchases a stock or cryptocurrency. This is sometimes done when an investor has lost money on a stock or cryptocurrency and wants to take a capital loss on their taxes. This is not legal in stocks and not an issue in crypto. What is not legal in stock trading is to immediately repurchase the stock. Doing so distorts the market and gives the impression of a higher trading volume than really exists. It is not illegal in crypto trading and estimates are that as much as 70% of crypto trades in some markets are wash trades. These are obviously not all people trying to get a tax break on crypto winter losses but rather traders seeking to distort the market and give the impression of more interest in Bitcoin than actually exists.

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