There is a world of difference between speculation and implementation but they are connected.
Even though price movements can be incredibly distracting they do serve to drive excitement in the market and attract new people to this exciting field, which does lead directly to more implementation.
For example, according to a recent report, there are now twice as many registered cryptotraders in Brazil than there are stock traders. In Russia, thanks to 185,000 news articles that were written about Bitcoin, more than half of the population now feels confident that they have a good grasp of what cryptocurrencies are.
Blockchain operates on the power of the network. Similar to the way we see the "wisdom of the crowd" in eToro, where each client that comes in whether they are a beginner or expert trader, strengthens the entire system.
Though the bitcoin network has not grown nearly as fast as her price, there has been an incredible rise in the number of full nodes, people who have downloaded the entire blockchain ledger in order to help verify transactions.
I'm proud to report that after 46 days of being flooded, the bitcoin network is showing signs of recovery and the backlog of transactions is finally clearing.
This recent pullback in the price has been a blessing in disguise.
Today's Highlights
Government Temp
BoJ Announcement
Getting Technical with Bitcoin
Please note: All data, figures & graphs are valid as of January 23rd. All trading carries risk. Only risk capital you're prepared to lose.
Traditional Markets
The good news is that the US government managed to come together long enough to get money flowing through its branches. The not so good news is that this most recent deal will only fund the government for another 16 days.
The hope is that in that time frame they'll be able to work out a more long-term solution but most political analysts are saying that this is very unlikely and we can expect another showdown in two weeks time.
The shutdown has not affected the stock market whatsoever, but it seems the temporary spending bill has. Markets on Wall Street saw a strong relief rally.
Asian markets this morning are have continued the momentum with both the Nikkei 225 and the China 50 up about 1.25%.
The story here is one of economic growth despite political deadlock. Earnings are good, corporations are doing well, so stocks go up. The head of the IMF, Christine Lagarde kicked off the Davos convention with an inspirational speech to address sum all this up saying that "the time fix the roof is when it's sunny outside."
Makes sense to me.
Japan Remains Cautious
The Bank of Japan's event this morning was fairly uneventful. They only made minor changes to their outlook on the economy. Though these changes could be seen as laying the groundwork to exit their ultra-aggressive stimulus program it's clear that they don't want to spook the markets by pulling out too abruptly.
My guess is that the BoJ governor Kuroda is looking at this graph...
Kuroda wants this chart to up, but ending stimulous would have the effect of sending it down. If he manages to build in some strong support at 110 Yens to the Dollar (blue line) or even break the dotted yellow line to the upside, they might be able to create some directional momentum that would make things easier to implement the changes they want.
Bitcoin Decongestion
As we alluded in the opening letter above, the recent price action and "sell-off" in cryptocurrencies has been really good for bitcoin.
Even though mass adoption is a dream come true, the network does need time to scale. While things are surging and the number of transactions skyrocket, it's difficult to do that.
Thanks to the declining prices, the transaction rate has come down nicely. At the peak in December, we were seeing more than 4.7 transactions per second. That number is now down to a more sustainable 3.24.
This has given time for the backlog to clear. Since December 8th, there have been more than 100,000 transactions at any point waiting to be added to the blockchain.
This morning, that number was seen as low 55,000. A much more normal number.
In the meantime, some solutions are starting to be implemented to improve the overall capacity of the network. The two main solutions at the moment are SegWit and Lightening.
SegWit has been in place since August but users have been slow to adopt it. The lightening network, on the other hand, is a lot newer and after months of testing, the first few transactions are just happening now.
For the first time in months, we're seeing real signs that bitcoin's odds of remaining the world's number one digital currency are increasing and with it the awesome possibility of a truly global and borderless monetary system have reemerged.
Bitcoin Price Analysis
Right, but what about the sell-off???
So, we can never really know what's going to happen in the future. However, we do know that what's happening at the moment is purely technical.
There has been no major breaking news that would point to a systematic breakdown of digital currencies or a global crackdown on regulation. Therefore, we must conclude that this price action is due to the tremendous rise in price and we're just seeing a normal pullback.
As I'm writing the level of $10,000 is being heavily tested but it wouldn't surprise me to see a gentle break below this round figure.
As I've mentioned before and was well documented, the next main level of support for bitcoin is at or around $8,000 per coin.
This graph shows three different types of support that can be found in this approximate area...
The weakest sign is the rising trend line in blue. These lines are drawn very differently by different analysts. However, the general theme remains the same and most retracements will lead back to some such support level.
Next is the breakout level (dotted purple line) of $8,300 that was first crossed to the upside with strong momentum on November 25th. One could argue that this is not the only breakout level on the chart ($11,750 for example), but it is the one that seems most relevant to me.
The third is the 200 day moving average (yellow line). This is the least subjective of the three and in traditional markets is considered a very compelling indicator. At the moment, it's reading $7,421. However, if we see continued consolidation or even orderly price declines over the next few days, it should rise nicely to be inline with the other two indications.
Many thanks as always for reading the reports and sending me your questions, comments, and feedback. I'm going out to meet some clients now in Zurich, then hop a train over to Davos for the afternoon.
Have an amazing day ahead!
eToro, Senior Market Analyst
Disclosure: This content is for information and educational purposes only and should not be considered investment advice or an investment recommendation. Past performance is not an indication of future results. All trading carries risk. Only risk capital you're prepared to lose.