• Luke Levine

Bitcoin: A Dangerous Lesson in Triangles

Do you know how many sides a dodecahedron has? Neither do I.

It's easier to keep things simple. Three is a much easier number to manage, e.g. a good old fashioned triangle.

Interestingly, Bitcoin thinks the same. The last three months has seen its price trade in a so called "triangle", almost religiously.

Let's start with what I mean by a "triangle". There's a method of analysing price charts called "technical analysis", which can literally be applied to the price of anything. We are essentially looking for price patterns and using them to predict what may happen to the price in the future. Those predictions are dictated by what happened in the past when a similar pattern occurred. I touched on technical analysis in another blog here. That was arguably more complicated. The triangle is as simple as it gets.

A little pre-amble...

There's three types of triangle... symmetric, ascending and descending. Here's what they look like....

The idea is that the asset price (black line) trades within the triangle shape (green lines), until it eventually "breaks out". Once broken out, the price usually continues in the breakout direction. The larger the triangle, the larger the breakout move.

The Ascending triangle is generally a bullish pattern, meaning that the price is more likely, based on history, to break out to the upside. The reverse is the Desending triangle, where the price is similarly more likely to break to the downside. In the middle however is the Symmetric triangle, which is neither positive nor negative. History says there's a 50/50 chance of a price break out in either direction.

Here's what Bitcoin has been doing this year.....

Looks familiar?

After a nice run higher in the first half of the year, the last three months have seen a textbook symmetrical triangle. Frustratingly, that's not particularly helpful as the directional outlook is neutral. History says it's 50/50. However, what we do know is that time is running out, the end of the pattern is approaching and the direction will be decided relatively soon. It's a huge triangle, so the resulting move will likely be huge too.

Why do we look at such technical patterns?

Cryptocurrencies are heavily analysed in this way, ranging from drawing simple triangles to computing way more complex statistical indicators. This is for good reason. Other asset classes have clear external catalysts that drive them. Currencies for example have interest rates (e.g. via central bank decisions), equities have company cash flows or earnings. Crypto assets arguably have none of the above. The result is a reliance on technical analysis, simply given the lack of other major "fundamentals" to consider.

This may not be the case forever. There's an argument to be made that crypto assets could be a hedge against uncertainty. We live in an interesting time. How will Bitcoin react when a global recession hits? Or perhaps in a more severe financial crisis? Will it be seen as a safe haven? These questions and many more are all yet to be answered.

So back to the triangle...

Bitcoin is clearly trading within the triangle boundaries and we are waiting for a "breakout", which more than likely will be a large powerful / explosive move.

If you are a bull, then a break above $10,700 should confirm your positive view. If you are a bear, a break below $9300 will confirm your negative view. If you are neither, then the eventual break of this patten may help you decide.

This is a critical time for Bitcoin (as it alway seem to be) and the next few weeks will likely dictate the next few months of price direction. I'm an optimist and a believer, so my bias is a breakout to the upside. I could well be wrong however and I have to prepare for that.

Watch this space for an update on how this progresses. If you haven't already, remember to subscribe so you don't miss an update!

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