The combination of weak near term technicals, a dip in hash rate, questions over a secretive miner/Core dev meeting, and sustained interest in ETH/ETC has pushed Bitcoin’s exchange rate down more than $20 over the weekend.
While the drama continues to run high in the Ethereum universe, Bitcoin has its own little bit of drama going on for the time being. First of all, with Segregated Witness rolling out to production in the next Core release and rumors of miner dissatisfaction over the past month, a group of seven large miners and over a dozen Core devs attended a closed-door meeting this weekend. Although details are sparse, speculation is that on-chain scalability is the topic du jour. Also adding pressure is the fact that we have seen a noticeable drop in the hash rate over the past few weeks now that the block reward has been cut in half. Below is a 2-month chart of the Bitcoin hash rate difficulty.
This drop has traders on edge about a potentially self-reinforcing cycle of lower prices and a lower hash rate, and while we cannot entirely dismiss this as a possibility we think that in the context of the longer term chart it is not something to worry too much right now (although it is certainly worth keeping an eye on). Take a look at the 9-month hash rate chart below. It looks like a minor pullback in a strong uptrend to us.
As we move on to the exchange markets we don’t find much reassurance here either. On the 3-day chart below we can see that the breakdown out of the pennant consolidation is now real and the price is making a run for support. Despite a pennant being a traditionally bullish formation, this failure does not come as much surprise given the momentum and volume have been unconvincing for weeks. Speaking of momentum, Willy and RSI are testing their centerlines while MACD accelerates to the downside. Conversely, the 200-period SMA has finally turned up signaling that despite the recent breakdown Bitcoin remains in a bull market consolidation.
One of the other features of note on the chart below is the volume profile setup which is still not great. There is a lot of work to be done all the way down to the $466 breakout point from back in May. However, the A/D line is fairly steady indicating that perhaps there are still buyers emerging above $600. Having said that, the longer term trendline and OTE long zone both sit around $500 and there is a relatively strong support area around the $550 low which we saw earlier this summer.
While it appears as though the market will remain weak over the short term until a new local low is carved out in the coming days, we are staying neutral with a longer term bullish bias. This means that the range trading strategy we have been mentioning for the past few weeks may be more difficult to implement in the current conditions, however, buying the dips remains a legitimate plan for those with a lower time preference. We think that in a year the $500 – 600 range will look great from an investment perspective.
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