After months of stability, Bitcoin has finally broken below the $6000 price level. Here’s why it’s even worse than you think.

Attention! Did you know that purely by coincidence, within 18 hours of bitcoin’s price crash, natural gas futures spiked by as much as 20% ? It made headlines in the financial world, but unless you’re a regular follower of commodity derivatives you might have missed it. Why am I talking about Natgas futures and not bitcoin? Well, by way of comparison, I want to show you why bitcoin “price action” or price movement is so lacking. For a person who is keen to trade bitcoin minute by minute I’ll show you my reservations with how the currency is currently trading, and why I believe it to be a bad sign of things to come

As a side note, this article follows on quite conveniently from my last one, where I compared bitcoin exchanges with oil futures exchanges.

Comparing Bitcoin with Natural Gas futures -The charts

Bitcoin

The action begins at 18.00 GMT, Tuesday evening (chart courtesy of bitmex)

Once the initial break below $6000 happens, there is some initial real buying and selling. But after the first six hours it completely dies a death and the market fades into nothingness. For a trader this is deadly. Price volatility gives a trader the opportunity to modify their position or hedge against other products. However, when we see the 9 hour ‘death zone’, it shows that there is very little true interest in the new BTC price. This is typical of a market with few participants. Sure, there are a few other price spikes, but again, this is a 30 minute chart, so its reasonably detailed, telling us the aftershock price spikes are very quick and hard to trade around.

…After the first six hours [trading] completely dies a death and the market fades into nothingness. For a trader this is deadly…When we see the 9 hour ‘death zone’, it shows that there is very little true interest in the new BTC price

Also, look at the volumes, they tell the rest of the story! By 1.00AM on Wednesday nearly all of the volume has gone. All of the major trades are made, and very few people are getting involved. In a healthy market, there should be more participants jumping into the new prices, but instead we don’t see anything. As is typical, the whales have moved the price, and back to sleep they go. If bitcoin were truly decentralized, others would be eager to buy at these new, cheaper prices.

In a healthy market, there should be more participants jumping into the new prices, but instead we don’t see anything

Natural Gas futures:

The action begins at 11AM, Wednesday morning! (chart courtesy of IG index)

Natural gas prices also exploded by almost 20% within a day of the bitcoin price spike. Let’s have a look at how different the price spike was! The initial spike reached 4800, up some ~700 ticks from the previous spike. Within two hours the price had sold back down to 4400, which is more than half the movement. This represents a true two way market. It happened on heavy volume, too. There were real sellers at the new, higher price!

The second spike, which was smaller, but reached an even higher price also had sellers, but, predictably, the retracement back down was much smaller, as presumably many of the initial sellers had already sold during the first price spike.

This is how a market should work…These participants are truly price sensitive and were happy to seize on the opportunity given to them with the price spike

After this there was a predictable consolidation period on low volume (as most traders were probably sleeping), but by 8AM the next day, prices were moving again. Finally, by the afternoon, more sellers came to the market, to take advantage of the new higher price, and sold it all the way back down to the initial price, before the spike.

This is how a market should work. New prices that are very far away from the old prices (20%!) were taken advantage of by market participants who were waiting to get involved. These participants are truly price sensitive and were happy to seize on the opportunity given to them with the price spike. This is because there are many different market participants, and they know that if they dont take advantage of price opportunities, other will. This incentive to profit from price discover is what gives markets a true two way behavior.

For a trader, this market is more ‘alive’ and thus more attractive to trade, opportunities come and go much faster in this market, there only a small time where the market didn’t move due to lack of participation, and that was typical due to trading hours.

What does this price action tell us about bitcoin?

[Lack of price action]is a bad sign for bitcoin, because it gives free reign to whales who are willing to push the price further…It’s a red rag to a bull…Which eventually will lead to [market participants] selling out of despair, creating a downwards domino effect.

Well, as mentioned above, a lack of two way price action is typical of a dead market, there simply are no buyers at the newer low price! That’s fine for a short period, but two 9 hour periods of almost zero volatility is indicative of a lack of participants, at least bit ones who are willing to move the market. This is a bad sign for bitcoin, because it gives free reign to whales who are willing to push the price further. If anything, the longer that the bitcoin price stays down here, the more it emboldens short sellers to push the price further and further down. This is especially true if there is zero price movement, because it tells the short sellers that there simply aren’t any buyers at these new prices! It’s a red rag to a bull, because the sellers know they can continue to push the price, which eventually will lead to more people selling out of despair, thus creating a downwards domino effect, a bit like price bubble, but in reverse!

I know that the new low price is a negative sign for bitcoin, but in another scenario it could be a simple buying opportunity. As we’ve seen when comparing its price action with the natgas futures, so far, this simply isn’t the case!

So, my recommendation to all you traders out there is to pay less attention to price, and more attention to how a product gets to the price, because you can tell a lot about the health of a market not only by its price, but from how it got there!