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Latest Move Up in Bitcoin Could Be a Fake One

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Be prepared to see more appreciation in the next couple of days, but the cryptocurrency is likely to move lower after that.

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Cutting right to the chase, my firm still doesn't support any short-term positions in the market.
 
Yesterday, we wrote that Chinese bitcoin exchanges BTC100 and BTCTrade were ordered by the Chinese government to close their bank accounts used to receive customer deposits. Today, Reuters reported that another exchange, Huobi.com, issued a statement that the bank handling their account would close them by April 18.
 
The following is from Reuters:
 
In December the central bank, the People's Bank of China (PBOC), banned financial institutions from trading in bitcoin, saying the government would act to prevent money laundering risks from the digital currency. It did not ban trading by individuals.
 
Since the ban, some media have reported that the PBOC had instructed domestic lenders to close the accounts of bitcoin exchanges by April 15. However the central bank said in a notice on their official Weibo micro-blogging website on March 21 that it has not issued such notices to banks.
 
Following the central bank ban on financial institutions trading in the digital currency, bitcoin exchange platform BTC China said it had stopped taking Chinese yuan deposits after a third-party payment provider abruptly cut off service.
 
Chinese Business News reported that the government had asked third-party payment services to stop handling bitcoin transactions.
 
It would seem that the Chinese authorities are making some kind of move against the currency in spite of what the PBOC claims. Yesterday, in our bitcoin commentary, we wrote about the move to close bank accounts of bitcoin exchanges:
 
This is one in a long string of attempts to limit the use of Bitcoin in the country. The main concern of the Chinese government is that bitcoin might be used to pull money out of China, which falls under capital controls imposed by the Chinese authorities.
 
The situation is getting tougher for bitcoin users in China. Right now it seems that local bitcoin exchanges might be forced to look for other options to continue operations, such as setting up shop outside of the country.
 
Now, let's have a look at the charts and see what's changed since yesterday.
 

 
Bitcoin declined heavily on BitStamp yesterday. It went 17.8% down compared with the previous day's close, and there was a more than sixfold increase in volume. This was a classic slump; the situation became extremely bearish, and the fact that the price tanked made opening short positions particularly tempting. There was, however, the possibility that we could see a move up. We highlighted this risk of going short in our bitcoin commentary yesterday:
 
The action later in the day today and the beginning of yesterday's session will be crucial in determining the short-term outlook here. If bitcoin closes today below $400 or moves below this level on strong volume tomorrow in the early hours, we'll likely consider going short.
 
On the other hand, if we see recovery today or tomorrow, it might be a short-lived countertrend rally. As trading such moves is relatively risky, we'll most likely remain on the sidelines if this scenario materializes and will wait for more signs of depreciation.
 
As it turns out, our reluctance to go short in spite of the strong move down was justified. Today, bitcoin has gone up 15.9%, recovering most of yesterday's losses (this was written after 11:00 a.m. EDT). The volume has been significant (already more than BTC35,000). There's definitely a lot going on in the market. But does this mean that the short-term situation is bullish now? Not necessarily, in our opinion.
 
We are prepared to see more appreciation in the next couple of days, but our guess is that bitcoin will move lower afterwards. It is also possible that the decline will resume tomorrow. Tomorrow's close will most probably tell us whether further appreciation is to be expected.
 
Either way, going long seems particularly risky at this time. If we see more weakness tomorrow or a move higher on declining volume, we might consider going short based on the possible move down. A move below $400 could be such an indication.
 

 
On BTC-e, the situation developed yesterday pretty much similarly as it did on BitStamp. Bitcoin went 18.7% down. There was a fourfold increase in volume, weaker than on BitStamp but strong by itself.
 
Today, bitcoin has appreciated 17.7% and the volume will most probably end up being higher than yesterday. We are currently above $400 and we might see more appreciation in the next day or days, but our bet is that such appreciation would be followed by further declines. It is also possible that we'll see another slump tomorrow. Tomorrow's close might clear up things and suggest if declines will follow immediately or after a few days of appreciation.
 
Summing up, in our opinion, no short-term positions should be kept in the bitcoin market at this time. Going long seems particularly risky at this time.
 
Trading position (short-term, our opinion): No positions. We might see more appreciation before a move down. Tomorrow's close might give us hints what to expect.

For the full version of this essay and more, visit Sunshine Profits' website.

Mike is a quantitative analyst focused on economic reality, not theoretical models. His investment thinking is grounded in empirical evidence and common sense. A holder of two master's degrees in quantitative methods and finance, he researches economic uncertainty, portfolio management, and investor behavior. At SunshineProfits.com he develops innovative investment tools, and is the author of the Bitcoin Trading Alert service.
No positions in stocks mentioned.
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