Support & Resistance
SALtoshi Whitepaper #109
Trading bitcoin (even as a newbie) reveals some interesting information about the market, especially the psychology and behavior of market participants. Information which otherwise might be overlooked and under-appreciated prior to becoming a trader. As someone who previously bought and held bitcoin without the intent to trade, certain indicators didn’t stand out or seem to matter, no matter how important.
Becoming a successful trader, or even deciding when might be an optimal time to enter the market — predicting which direction the market might move is essential. Certainly nobody knows for sure which way the market will move, but educated guesses can lead to profits sometimes, and sometimes is better than never.
For those who don’t know — bitcoin’s market value is determined by buyers (bulls) and sellers (bears) agreeing on a specific price. It’s really that simple. Every trade is basically an online business deal, and anybody can partake. No centralized authorities are capable of setting bitcoin’s price, unlike gold in America in 1934 — when the government price of gold was increased to $35 per ounce, and held at $35 until 1971. Unlike gold, bitcoin is a free market.
Two market indicators are worth mentioning and unpacking today — support and resistance, which are relatively simple, and should be used in relation with varying timeframes. Local support/resistance covers short-term, although I’m not sure of the exact timeframe — might be a couple of weeks or months. All-time support/resistance is self-explanatory.
Fun fact — I don’t know if all-time support/resistance is an actual term, but it makes sense to me, and I’m having trouble finding definitions online. Actually, only all-time resistance makes sense, which translates to all-time high. All-time support or low doesn’t make sense, because that would always be zero. I’m new to trading, so cut me a break, please and thank you. Regardless, today’s letter is mostly about local.
Local support seems to be $40k. Although the market has been bearish lately, we haven’t seen many sell orders filled below $40k. We fell below on 10 January, but reclaimed intraday, which means some bears were willing to sell below $40k, but not enough to create further downside. This local support level has significant meaning in terms of how market participants collectively perceive bitcoin’s current market value.
Holding support at $40k means that market consensus is in agreement that although bitcoin is not currently worth the all-time high of $68k or higher, it’s also not worth less than $40k. In theory, if bitcoin drops below $40k for the time being, then plenty of bulls are willing to step in (showing support), and deploy enough capital to take advantage of current prices and exhaust the bears — holding $40k.
If local support is truly $40k (nobody knows for sure), now is likely a great buying opportunity for anybody. If support is strong enough, bitcoin would only be able to move sideways or up. Sideways markets are least beneficial for traders, like trying to surf without waves. Surfers need the water to move, and traders need the market to move. Volatility is key, which is ironically some people’s greatest criticism.
Local and all-time resistance is $68k (hoping my definition of local is accurate). Bulls were exhausted, and we ran out of steam, so bears took over — driving the market down to current levels. Resistance is inverted support. Some bulls were willing to buy at $68k, but clearly most bulls were either standing by or ran out of capital. If they were standing by, then they can now take advantage of a 37 percent discount.
Resistance is interesting, because bulls are completely convinced of each bitcoin being worth millions of dollars, even tens of millions of dollars. However, the collective market does not agree, so we still haven’t cracked $100k. Some things take time. For the time being — bears outnumber bulls, and bears clearly have more capital to manipulate the market, keeping prices lower.
By the way, every financial market is manipulated. The very essence of supply and demand as a business strategy is manipulation. I have something you want? My goal is to manipulate your decision, so you’ll end up paying the highest price. People are not necessarily being cheated though, especially with a quality asset like Bitcoin. Makes me chuckle to think about people actually saying Bitcoin is a Ponzi scheme.
According to the United States government, a Ponzi scheme is an investment fraud that pays existing investors with funds collected from new investors. We can debunk the accusation of Bitcoin as a Ponzi based on the first sentence of the definition. Bitcoin is not simply an “investment.” It’s an invincible computing network. Also, to pay “existing investors,” this implies that early adopters and HODLers are selling bitcoin, and leaving the market forever.
Remember last year when we fell from $64k, consolidating between $30k and $40k for nearly 3 months? Not saying history is repeating itself. However, bitcoin is known for making higher lows in addition to higher highs. Last year, bulls fought successfully to hold $30k after falling from an all-time high, and the low number this year might be around $40k. Again, if this is true, now is likely a great buying opportunity.
In theory, support levels will continue increasing, making all bitcoin holders profitable over time. Bitcoin’s strong support levels are made possible due to the fixed supply of 21 million coins. Because of absolute scarcity and rules of the network, people cannot simply rush to create an inflow of additional supply when the market is up. Let’s compare bitcoin mining to gold mining.
If the gold market shoots up overnight, more people can simply dig faster and in more places to find more gold. Other than the physics of digging, gold mining has no globally distributed rules. More gold equals better paydays for miners. Gold’s production rate would subsequently increase (higher inflation levels). As a result, higher inflation levels would cause the market value of everybody’s gold to become weaker.
If the bitcoin market shoots up overnight, more people can simply plug in their bitcoin mining machines to mine bitcoin. However, bitcoin mining has very specific globally distributed rules. A very specific amount of bitcoin are allowed to be mined in each block, which occurs approximately every 10 minutes. Regardless of how many people are mining bitcoin, the number of bitcoin mined will not change — maintaining steady supply.
900 new bitcoin are mined each day during the current mining epoch. An epoch is automatically adjusted every 4 years, according to the rules. The most recent adjustment was in 2020, so the next adjustment is scheduled for 2024 — which is when the number of new bitcoin will reduce by 50 percent. This is the monetary policy of Bitcoin (my favorite feature) — it happens until the number of new bitcoin reaches 0, and it changes for nobody, unless we reach global consensus.
Because of Bitcoin’s strict monetary policy, the market is relatively volatile. If Bitcoin were to have a loose monetary policy, we would likely never see large upswings, and investing/trading wouldn’t remain very lucrative. In reality, when large crowds of new buyers enter the market (which happens often), demand is naturally higher, while the supply schedule doesn’t budge, causing parabolic moves to the upside. With the exception of network failure, bitcoin cannot ever go to zero. As long as bitcoin’s market has at least one buyer and one seller, bitcoin will always be worth something.
Until next time,
P.S. — A month equals 4 weeks in February only. Every other month has 30 days or more, which means 11 out of 12 months are longer than 4 weeks. Thinking about this last night while trying to sleep blew my mind.