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Why this year’s move in Bitcoin could be a dead-cat bounce

As dead-cat bounces go, the move in Bitcoin during 2019 has been a pretty high one — although I must stress, I’m no expert at dropping feline carcasses from a great height to test their elastic potential energy.

But Bitcoin’s move from around $3,450 per coin in January to $7,716 as I write, represents a gain of more than 120%. Nice work if you got into the cryptocurrency in January, but still a long way down for those unfortunate enough to have bought near the high of December 2017 close to $20,000.

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Speculators lack predictive tools with Bitcoin

I admit not seeing the recent up move coming. In my defence, there’s not much to go on. With shares, for example, I can look at valuations to gauge whether the underlying business and its assets are priced cheaply, expensively or just right.

I can also take a stab at projecting future incoming cash flows and how they might grow to push a share price higher. I can monitor company news flow to try to detect step-changes in a firm’s prospects and outlook because of favourable events.

However, with Bitcoin, none of those predictive tools are at my disposal. What I can do, though, is study the price chart to try to work out what it’s saying about speculator sentiment, which I reckon is pretty much all that drives the price given the lack of fundamentals behind Bitcoin.

And to my reading, the price action says speculators have been accumulating Bitcoin since January. The reason for that could be because the price looked like it had stopped falling. So, on went the highly speculative positions of those hoping that, one day, Bitcoin would move back towards the heady heights of $20,000.

Buying begets more buying

The buying probably caused the share price to move up. A little at first, but seeing the movement others maybe started saying, “Bitcoin’s moving” and more buying happened. And because of that, Bitcoin went higher, and the higher it went the more the momentum speculators piled in. And the more they piled in, the higher Bitcoin moved.

I think that description is the essence of what causes a dead-cat bounce. Nothing has changed in the case for or against Bitcoin, but speculation happened. Sooner or later, the speculators will run out of fire power, and when we reach that point, Bitcoin is likely to plunge again. To me, the up-move looks pretty full so Bitcoin looks riskier than ever right now, and I wouldn’t touch it with a bargepole.

But in fairness, I wouldn’t touch Bitcoin with a bargepole wherever the price is. Instead, I think a much better opportunity for successful speculation and investment exists in shares and share-backed investments.

If you look at the stock market there’s something for all tastes and risk-tolerances, from speculative, fast-moving stocks such as Sirius Minerals, through to dividend-paying, low-cost index tracking funds such as those following the FTSE 100.

I think the stock market is a far better vehicle for the potential generation of wealth than the world of cryptocurrencies. And you’ve come to the right place here at The Motley Fool to pick up some great investing ideas.

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Kevin Godbold has no position in any share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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