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CoinDesk’s technical analysis of Bitcoin gets a hard dose of reality

Warning: Trading the technicals—or even the fundamentals—may be hazardous to your wealth

bear chart

Does this chart make me look bullish? (via Shutterstock)

If you were to trade bitcoin according to analysis found on CoinDesk this week, you would have lost your shirt.

On Tuesday at 5 a.m. Eastern Time, a CoinDesk headline read “Bitcoin Price Eyes $7.4K After Defense of Key Support.” In it, Omkar Godbole laid out the case for what he called “a minor rally.” For instance, bitcoin prices tested its 50-day moving average—around $6,938—twice in two days but didn’t fall below it.

Godbole saw other bullish signs in the charts. Bitcoin’s hourly graph showed prices testing the upper ends of a downward sloping channel. Break above that and it’ll confirm a bullish move, he said. Another chart he posted showed an upward-sloping support line starting from the end of June and connecting with a short-term bottom from mid-July. Higher lows for technical analysts are also a bullish signal and on Tuesday morning, bitcoin was merely testing that support.

Of course, we now know what happened next.

Bitcoin didn’t just test the 50-day moving average or upward-sloping support. It plunged 12.5 percent just a few hours after the piece was posted.

To be sure, Godbole tempered his bullish call with a couple of caveats:

“While there is a reason to be optimistic, the bulls can’t afford to lower their guard as the 5-day MA and 10-day MAs are still biased toward the bears.

“If prices close today (as per UTC) below $6,847 (low of the previous day’s bearish outside-day candle), the sell-off from the July high of $8,507 would resume, sending BTC below the rising trendline.”

To translate it for those not familiar with technical analysis, you can read it as, “There are a couple of bearish signals here, so prices could go down, too.”

Looking at Godbole’s story feed on CoinDesk, you can see a mixed bag of bullish and bearish calls on bitcoin all within a few days of each other. That’s not because Godbole has done a bad job of applying technical analysis to bitcoin charts or that he’s changes his outlooks whichever way the wind blows. His reasoning would find validity among technicians, a type of analyst that relies almost solely on price charts to predict of anything traded in the markets.

However, his bad call brings to light the problems applying either one of the two strains of analysis found in finance today: fundamental and technical. These two methods are often at odds philosophically because each holds some important major assumptions. And those assumptions aren’t always applicable to Bitcoin, making attempts to predict its future price almost a fool’s errand.

A key feature of fundamental analysis is to figure out the underlying value of a security or, in this case, a cryptocurrency. Note the term “value” and not “price”. The two are, well, fundamentally different. What something trades for right now isn’t what its value is. A fundamental analyst looks for large discrepancies between the two in order to make a profit. If something were priced well below its value, the analyst would recommend buying it all day long until the price reflects value. Likewise, overpriced securities should be sold short until the price falls to match value. This all assumes that one day, price will catch up to value—a big leap of faith.

Figuring out value is a tall order and can be more art than science. It relies on a breathtaking amount of assumptions. Say an analyst was to look at a coin. She would have to asses the code, the quality of management, the market demand for it, its ability to gain acceptance, the ease it can be traded, regulatory pressures, the overall economy, the crypto market as a whole, the market for similar coins, threats from competitors, the ability of insiders to dump more coins on to the market, and on and on.

What’s more, fundamental analysts can look at the same data points and come up with completely different outlooks based on such things as the time periods they choose to analyze and their own personal biases, to name just two.

The technical analyst doesn’t worry about any of these problems. That’s because the big assumption in technical analysis is that price already reflects all information there is to know. Ask a technician about where they see earnings headed, and he will likely give you a blank stare. It’s not a necessary component of his work because prices aggregate everyone else’s assumptions.

Technical analysts see prices moving in trends that can be repeated time and time again. They don’t just see trend channels or support and resistance lines. There are triangles, wedges, cup-and-handles, head-and-shoulders, inverted head-and-shoulders, double tops, double bottoms—all dancing around a price chart in the eyes of a technician.

And like fundamental analysts, technical analysts often don’t agree with each other looking at the same information. In either case, picking the analyst to follow ultimately depends on how comfortable you are with their outlooks. That, in turn, can be a product of your bias so that’s not as straightforward, either.

That brings us to Bitcoin and other cryptocurrencies.

Coming up with the fundamentals for, say, bitcoin isn’t as easy as the HODL bros would have you believe. There are far many variables than just “a lot of people like it on Steem and Reddit”.

On the technical side, a major assumption may be violated—that price reflects all information there is to know. If the price of bitcoin can be manipulated (as the SEC worries about), trying to figure out patterns could be a complete waste of time. Yet many cling to the idea that technical analysis is the only way to trade bitcoin and other cryptos because using fundamental analysis to figure out value is next to impossible.

In its disclaimer on each of Godbole’s pieces, CoinDesk notes:

“This article is intended as a news item to inform our readers of various events and developments that affect, or that might in the future affect, the value of the cryptocurrency described above.”

However, technical analysis—like a fundamental-based forecast—is ultimately an opinion item, not a news item. And acting on such opinion can turn out to be like handing a toddler a chainsaw—sure, there’s a chance she could handle it but it’s more likely she could also cut off the legs of your dining room table or your dog.

Lawrence Lewitinn, CFA is editor in chief of Modern Consensus. Disclosure: Lewitinn owns no cryptocurrencies in his portfolio.