Cryptocurrencies, specifically Bitcoin, seem to have been the talk of the town over recent months. With prices having risen significantly it is easy to understand why. Headlines like the one below can contribute to many investors throwing caution to the wind and making an emotional purchase decision.
When this article was written, Bitcoin was around $56,000. As I am writing this article, Bitcoin has dropped to around $36,000 (up from $30,000 just a few hours ago), having lost approximately 36% in just over one-months’ time. I am spotlighting Bitcoin for this article for two reasons: to share Bradley’s story and to illustrate how I believe technical analysis could have helped investors limit potential losses in Bitcoin had they been considering buying it in recent weeks or months.
“Bradley” made a profitable investment decision having purchased $1,000 of Bitcoin over a year ago. Over that time, he watched his investment turn into $8,000 in recent months, and as his gains have increased, so did his confidence. These circumstances contributed to him doubling down on his investment and purchasing another $8,000 worth of Bitcoin. This took place around the time when it was priced in the mid-$50,000’s. He was convinced it was going to go much higher, justifying his decision with reasons listed in many different news articles, including the one referenced above. Fast forward to today and within a couple months he has lost over half of the gains that took him over a year to accumulate.
Now, Bitcoin may eventually go higher, and he may recover his short-term losses. But with stock markets today at all-time highs, I believe his story offers an excellent opportunity to revisit risk management and how I believe investors can try to protect themselves from these types of situations in the future. This article will be a little long, but I hope you will read it in its entirety. Your ability to protect your “pig” (i.e. financial wealth) in the months and years to come my depend upon it.
If you have been reading my primary trend updates over recent months, you are aware of the importance I place in trend channels as illustrated in Chapter 6 of my book Protecting The Pig. In the charts that follow, I am going to show you three different perspectives of Bitcoin, and how I believe technical analysis has been warning of potential losses in recent weeks. First, look at a simple one-year price chart below of Bitcoin over the past year.
BITCOIN Price Chart
Chart courtesy of StockCharts.com
By itself, this price chart does not provide much context to help an investor come to any conclusions. So, let us rectify that by identifying potential rising and declining trend channels to give us more perspective. Let us begin first with the potential positive trend channel shown below.
BITCOIN with RISING CHANNELS
Chart courtesy of StockCharts.com
The two rising dashed green lines above help identify a potential rising trend channel. Until yesterday, price was at the Blue Line which also coincided with the bottom of the trend channel. But today price has broken down below both. As a result of this price behavior, I believe any prudent investor should look for potential evidence if the trend may be changing. For that, look at the chart below.
BITCOIN with DECLINING CHANNELS
Chart courtesy of StockCharts.com
The two rising red lines above help identify a potential declining trend channel. You will notice that from this perspective, price has dropped from the potential “top” of the declining price channel to the bottom, and now is hovering near the middle.
So, referring once again to the article above, will Bitcoin go to $100,000 by the end of 2021? Only time will tell. But I believe indicators have been showing for many weeks now that the short-term direction was more likely down than up.
Thank you for reading this article and if you know someone who needs help investing their wealth and who is worried about suffering significant investment loss, please invite them to sign up for a complimentary 30-minute phone call with me by going to https://BlueLineInvesting.YouCanBook.Me/.
Jeff Link
Disclaimers:
BLUE LINE INVESTING® (BLI) is an actively managed investment process that pursues our mission by combining a trend following investment philosophy and a “buy low, sell high” investment strategy. Our mission is to grow our client’s financial wealth over a full market cycle in a risk-managed and tax-efficient way.
We monitor the relationship between price and the Blue Line over time to help identify which stock markets worldwide are experiencing rising, sideways, and declining primary trends. We prefer to invest in those markets experiencing rising or sideways primary trends, while avoiding those markets experiencing declining primary trends. The Blue Line helps us identify these trends, and when changes may be taking place.
Technical analysis is a method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volumes. Technical analysis attempts to predict a future stock price or direction based on market trends. The assumption is that the market follows discernible patterns and if these patterns can be identified then a prediction can be made. The risk is that markets may not always follow patterns. There are certain limitations to technical analysis research, such as the calculation results being impacted by changes in security price during periods of market volatility. Technical analysis is one of many indicators that may be used to analyze market data for investing purposes and should not be considered a guaranteed prediction of market activity. The opinions expressed are those of BLI. The opinions referenced are as of the date of publication and are subject to change without notice. BLI reserves the right to modify its current investment strategies based on changing market dynamics or client needs.
Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. The information contained herein should not be considered a recommendation to purchase or sell any particular security. Forward looking statements cannot be guaranteed.
Guardian Wealth Advisors, LLC (“GWA”) is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about GWA’s investment advisory services can be found in its Form ADV Part 2, which is available upon request.
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