I won’t bother the reader with writing a monologue on the history of Bitcoin which is well known by many in this field and widely available on the net for the neophytes. Needless to say, as the mother of cryptocurrencies, Bitcoin has received a lot of attention in the mainstream media and has been attracting anyone from the average Joe to the major financial investor.
Over the last 12 months, institutional investors have been looking for a way to enter this novel and extremely volatile market in search for yield. Attempts to set up financial vehicles such as ETFs have been pushed back by the SEC as described in my article, Bitcoin: What’s all the buzz about ETFs, ETNs and ADRs? However, the regulators are starting to show some degree of flexibility as the first regulated stable coins have been approved, paving the way for institutional funds to more easily access the crypto market, while Security Token Offerings (STO) start to attract Private Equity and Venture Capital funds in this space.
Taking a look at the long-term chart, we can appreciate the extent of the rally that Bitcoin has enjoyed over the last 4 years, rising from a low of $150 up to almost $20,000 at the end of last year. Since then, the price has been dropping in a healthy correction that is still looking for a bottom, before the resumption of the bull trend. This bear market has naturally been dragging all other cryptos along with it as sentiment reversed following what looked like an almost vertical rise in prices back in 2017.
Unlike many of the top altcoins, the price structure of this corrective move hasn’t shown a clean 3-wave pattern. Instead, the price has been trending sideways with short ups and downs since February and is yet to show a clear move in either direction. This is very typical of a wave 4 move, more so when the prior wave 2 of the same degree corrects in a short and decisive manner as explained by the rule of alternation. What we are seeing in Bitcoin is one bloody complex correction that will likely play out in one of two ways.
There are four main corrective patterns in Elliott Wave Theory:
- Zigzag – 5-3-5 pattern, the most common corrective wave
- Flat – 3-3-5 pattern, can be regular, expanded or running
- Triangle – 3-3-3-3-3 pattern, can be ascending, descending, contracting or expanding
- Combination – complex corrective wave that combines any of the above as a Double Three or Triple Three
The image below tries to illustrate the difference between a corrective ABC move as a zigzag, and a more complex combination made up of a flat and a triangle.
Unlike other well defined patterns in Elliott Wave theory, complex corrections can incorporate a combination of any corrective pattern, including Flats, Zigzags and Triangles. The image above compares a “standard” zigzag correction with an example of a Double Three combination which is composed of a WXY pattern, where W and Y can take the shape of either a Zigzag, Flat or Triangle while the central wave X can take on any 3-wave structure.
Moreover, Double Threes can only have one zigzag and one triangle in the first and third positions, and triangles only form in the final wave of the combination. Triple Threes are similar in that they also allow a combination of different corrective patterns and are made up of 5 corrective sub-waves labelled WXYXZ.
Looking at the price structure of Bitcoin, there are two primary counts that I am seeing. The first one is shaped as an ABC move but with wave C shaping up as an ending diagonal. The latter is a 5-wave pattern that is corrective in nature (3-3-3-3-3) but follows the impulsive trend. It is usually found in a 5th wave marking the end of a strong impulsive move, but can also be seen in the wave C position, though it is a rare occurrence. In this scenario, we are in the last leg down of this ending diagonal to complete the entire correction and should bottom somewhere around or just under $4,700.
In the second count shown below, we are looking at a double three combination made up of a zigzag in the (w) position followed by a corrective wave (x). Instead of the ending diagonal, Bitcoin would be dropping in a w-x-y pattern within the (y) wave that would likely push the price further down compared to the above count. Wave x of (y) can be labelled at different positions, although it doesn’t necessarily change the ensuing wave y of (y).
My primary expectation is for Bitcoin to drop from the current level down to the 38.2% retracement of the full wave (3) move near or just below the $4,700 mark to complete the ending diagonal. This is the cleanest count that I can see from the price action in this year-long wave (4).
If the price were to drop strongly below that level, that structure would be invalidated and BTC would very likely follow through as a double three with wave y of (y) taking a sharp dive by end of the year, and look for a bottom in the $3,000-$3,500 range, targeting the 50% retracement which is usually the deepest level for a wave 4. In an extended wave 3 move, the ensuing wave 4 usually bottoms near the previous smaller degree 4th wave, around $3,000 in the case of Bitcoin, so this scenario can still play out and fall within the standard EW guidelines.
There is the possibility that the correction is already over with wave (y) having completed as a flat descending triangle but this count is not on my radar unless the price starts moving strongly above $7,000 from here and then targets the $12,000 range in a 5-wave pattern, followed by a 3-wave corrective down-move. However, that looks increasingly unlikely as the price continues to trend sideways. Not for long though.
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