Is Bitcoin Back from the Dead? A Technical Note

There’s a Lazarus story to be told in the charts this morning, and since other media are reactive (not proactive) here we go again looking into the future ahead of the pack.

Yes, I am still a skeptic.  But an honest one at that, and we can see in the latest chart I’ve drawn up for you to look at, how the Bitcoin revolution could be back – with a vengeance and new highs – over the balance of summer.

But it’s not a sure thing, by any stretch, because we don’t yet know whether the decline from all-times highs was impulsive or corrective, in nature.

imageWhat I will mention is that Bitcoins are now closing in on the $600 (dollar) range again, and a break out over the $700 area will likely mean a fresh run of Bitcoins to the $1,700 to $2,100 area.  For those who have been patient, this gets to be pretty nice prospects.

However, the cautionary note is that it could still collapse before the $700 level and go down to fresh lows…it all depends on how the markets work out.

Let me run through the chart I’ve cobbled up – based on a chart from www.bitcoincharts.com which is a fine source for the underlying data.

First, a discussion about how I draw charts.  It’s my own kluge of a system, but it works well for me.

You begin with a major decline and draw a line ‘a’ down the successive tops on the way down.

Next, you copy this line and slide it down to the bottom of the first major spike down.  This is labeled line ‘b’ in my chart.

The next step is to use a graphs tool to draw a line indicating the distance from line ‘a’ to line ‘b’ and we call this line ‘c’.

Now, you copy line ‘c’ and place it above line ‘a’ so that you can then copy line ‘a’ and place the copy (line ‘e’) equidistant from the ‘a’ line.

In other words, you have ‘b’ the same distance down as ‘e’ is on the upper side.

This defines a price channel.

No, it is not as mathematically precise as crunching the 2-standard deviation trend channel, but it’s easy as pi and it’s easily shown to the visually oriented learner.

You will see that I have also labeled an Elliott wave 1 down, a 2 up, and 3 down on the chart.

The impulsive/corrective question devolves to estimating whether this is a wave 4, which implies a 5 (and new all-time lows) or whether it is a major fresh move.

image

A more aggressive way to draw the chart suggests that the breakout is already in play and took place around the $525 area.  But that doesn’t end the daunting problem of the Elliott wave 2 peak which will define the current move as a wave 4 (with 5 down to come) or a new C move to the higher highs.

There are two “deal points” implied by the charts.

First is that either the $700 range will be critical or the breakout is well underway already, depending on how you draw charts.

The reason is simple:  A move above $700 will infer that the price of Bitcoins is “going out of channel” to the upside and that may be time to climb aboard.  Or, the move over $525 or so, was the breakout and it’s now game on.

There’s time to be thoughtful.  Remember in Elliott wave theory, the new highs (that $1,700 to $2,100 kind of range) is not entirely “in the bag” until the old decline peak (2) has been exceeded.  That would be in the $920 area, approximately. 

If Bitcoins break above this level, then it becomes a (relatively) lower risk to acquire some and settle in for what could be a 3-6 month ride to new all-time highs.

No, I’m not a buyer of Bitcoins yet, but I’m watching.

Also, don’t forget that according to IRS, in an advisory published in March, Bitcoin “profits” are taxable:

IR-2014-36, March. 25, 2014

WASHINGTON — The Internal Revenue Service today issued a notice providing answers to frequently asked questions (FAQs) on virtual currency, such as bitcoin. These FAQs provide basic information on the U.S. federal tax implications of transactions in, or transactions that use, virtual currency.

In some environments, virtual currency operates like “real” currency — i.e., the coin and paper money of the United States or of any other country that is designated as legal tender, circulates, and is customarily used and accepted as a medium of exchange in the country of issuance — but it does not have legal tender status in any jurisdiction.

The notice provides that virtual currency is treated as property for U.S. federal tax purposes.  General tax principles that apply to property transactions apply to transactions using virtual currency.  Among other things, this means that:

  • Wages paid to employees using virtual currency are taxable to the employee, must be reported by an employer on a Form W-2, and are subject to federal income tax withholding and payroll taxes.
  • Payments using virtual currency made to independent contractors and other service providers are taxable and self-employment tax rules generally apply.  Normally, payers must issue Form 1099.
  • The character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer.
  • A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property.

Further details, including a set of 16 questions and answers, are in Notice 2014-21, posted today on IRS.gov.

Beware of charlatans who will try to convince you that virtual currencies are without tax implications.  IRS has another take on that and they have enough horsepower to prevail.

If you’re tempted to invest in Bitcoins, there is some reason to anticipate an increase in value to interesting levels, now that we’re past $525,  once the chart issues around $700 and $920 have been put to bed, it could be (taxable) yee-haw time.  I love to pay taxes because it means I’ve made money on something..

The bottom line of this technical note is simple:  We’re getting close to a point where reconsidering Bitcoin could make sense if you’ve got some mad money laying about.  Or, you could simply plan a trip to Las Vegas.

Oh, don’t forget, Google Trends is an interesting (non-numeric) coincident indicator.  And we expect Bitcoins will be popping up in our www.nostracodeus.com data, shortly, as well.

Monday Headlines, in Brief

The election in Ukraine is a done deal and the new president of the place is billionaire Petro Poroshenko who is firmly in the EU/Western camp.

The next couple of weeks should give us some sense of how his presidency will work out.  Prior to the election, he had promised to sell his Roshen Group interest – that’s the candy company roll-up he built that turned him into a billionaire.

Then there’s the matter of how to bring peace to the eastern provinces (such as Luhansk and Donetsk regions) where pro-Russian upwelling continues.

If he’s able to deliver, then a peaceful EU has another problem off the table, but with elections, no sooner is a friendly government installed one place, than rebellion of the voters in Europe becomes apparent.

Specifically, the Eurosceptics and UKIP made huge gains in this weekend’s election and people in the EU, it seems, are not such happy campers.

So much so, in fact, that it’s being called a “political earthquake” in reports like this one from The Economist.

The Lite Part

Since US markets are closed for the holiday (here I thought it was next weekend!) I’ll skip the usual assortment of acerbic comments on anything that moves.

Instead, the juicy stuff (including a shocker follow-up to last Friday’s report on automatic writing,  will have to wait for tomorrow morning’s report.

By way of saying “Thank you” to Peoplenomics.com subscribers, who keep the power up on this server, too, we do have some Memorial Day comments on the current state of America’s military management.  (link in next post)

So while you wander through the first of the summer’s trifecta of long weekends, I’ll be back at the two most pressing problems around here:  A breakthrough approach to medicine (which will be on the Peoplenomics site Wednesday morning) and some experiments on application of neural network forecasting tools to aggregated market data.

Either that, or I’ll just go back to bed and get some sleep.  It’ll be a hard choice, since both the ideas and the pillow will be there as the day wears on.

Until tomorrow, then…Write when you break-eve.n

George    george@ure.net

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