Is Bitcoin Technical Trading a Fool’s Errand?

Bitcoin made an impressive recovery in 2023. We are again hearing the mantra that Bitcoin will go up forever. However, those who were badly hurt by crypto winter have their doubts. What is clear is that short to medium term trading of Bitcoin can be very profitable, albeit risky. Many who trade Bitcoin rely on technical indicators just like stock traders do. Considering how much Bitcoin wash trading exists, is Bitcoin technical trading a fool’s errand?

How To Predict Market Prices

If you are trading futures on a commodity like wheat, corn, or soybeans there are two ways to predict prices. One is to look at what drives supply and demand. Is there a drought on the American Great Plains? How is the war in Ukraine affecting production and shipping? And is production of corn, wheat, or soybeans keeping up with demand? These fundamentals eventually determine prices. Meanwhile, the market tries to anticipate supply and demand and buys and sells accordingly. This is market sentiment. Today Bitcoin traders seek to predict prices based on supply and demand over the long haul. They buy and sell over the medium to short term using technical indicators.

Technical Cues For Trading Markets

Markets for trading things like commodities have existed for centuries. There was a market for trading tulip bulbs in Holland four hundred years ago. That market had one of the most famous boom and bust cycles in any market at any time, the tulip mania. On the other side of the world at the end of the 1600s Japan had a rice market. It was in that market that the first use of technical indicators occurred. This approach, called Japanese Candlesticks, is still used for trading today.  

The Market Will Tell You What The Market Will Do Next

Humans are creatures of habit. So are humans who trade stocks, commodity futures, foreign currencies, and cryptocurrencies. The point is that the sum total of responses by traders to any type of market situation tends to be similar each and every time a specific situation occurs. Thus, one can detect patterns in market pricing over time. When a trader identifies the first part of the pattern, he or she can reasonably assume that the next part of the pattern will follow. Thus, technical cues derived from trading volume, moving averages, or a relative strength index can help you see where the market is going next. This approach can be very useful providing that the indicators are not based on false information!

When The Market Misleads You

There are two common risks for traders of stocks, commodities, foreign currencies, or cryptocurrencies. One is that information about fundamentals is being hyped and both investors and traders are tricked into buying into a fantom bull market. This is especially common with penny stocks but also occurs with hype in the crypto market. The other is when one or more actors are manipulating the technical cues that traders rely on to predict short or medium term pricing. This is a special concern in Bitcoin trading because of the high level of wash trading. Traders get sucked into a fantom surge in Bitcoin price only to buy at the peak and then see immediate losses.

What Is Wash Trading?

There are numerous websites that follow crypto trading. They commonly note how various technical indicators are reacting to given market situations. Thus, anything that might foul up the accuracy of these indicators is important for anyone trading Bitcoin or other cryptocurrencies. Wash trading has to do with selling and then immediately repurchasing a traded asset. This practice is a sufficiently important issue in the stock market that the market and the Internal Revenue Service have rules governing wash trading.

When a person buys a stock and it falls in price they may decide to sell it. Because they lost money on their investment they may be able to take a loss on their taxes which, in turn, would count against other income. Thus, they can reduce their taxes for the year in question. This is all perfectly legal. However, the investor believes that the stock will go back up in price so they immediately purchase it again. Thus, their selling and buying is a “wash.” The IRS sees this as an attempt to cheat on their taxes and will not allow the deduction based on losing money on the stock. The stock market sees this as potential manipulation. Because wash trading accounts for such a high percentage of Bitcoin trades it presents a risk for traders.

Market Volume As An Indicator or Rising Asset Price

Traders commonly see high trading volume as an indicator of more buyers or more sellers. When market volume goes up at the same time that crypto prices go up the assumption is that interest in Bitcoin, Ether, or one of the altcoins is going to drive prices up. When the increase in trading volume is exclusively due to wash trading the consequences of using technical cues as a guide to buying into an apparent Bitcoin rally can be disastrous for the unwary trader.

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