May 07, 2020 10:49
While stock markets and commodity markets like oil have experienced record falls this year, all eyes are now on the cryptocurrency market. An event that is written into the rules of bitcoin’s underlying code took place in May and has traders and investors very excited. Read on to learn more about it and the potential trading opportunities available.
The bitcoin halving – hype or hope?
Once every four years, the reward bitcoin miners receive gets cut in half. It’s important because miners who process bitcoin transactions and add these ‘blocks’ to the cryptos underlying blockchain ledger are compensated in bitcoin. This is the only way new bitcoins enter the supply chain.
In the beginning, the reward for mining bitcoin was 50 BTC. On 28 November 2012, it fell to 25 BTC. On 9 July 2016, it fell again to 12.5 BTC. On 12 May 2020, a miner’s reward fell to 6.25 BTC per block they add to the blockchain ledger using their high-spec computers. The halving happened at block 630,000.
While there has been a lot of hype around this event, many are still hoping that the price of bitcoin will rise. This is because, in the law of supply and demand, if the supply of a product falls but demand stays the same, the price often increases. This is due to the fact that more people are trying to buy something that there is less of.
In the past two halvings, bitcoin’s overall price saw its value rise a year before and the year after, as the image shows below:
However, these were during much better economic times than in 2020. The impact of Covid-19 has wreaked havoc in the global economy and financial markets this year, so the backdrop to this month’s halving is very different. This is where analyzing the technical picture becomes more useful, as we discuss in the next section.
How to trade bitcoin
Below is the long-term, weekly price chart of Bitcoin against the US dollar (BTCUSD).
Source: Admiral Markets MetaTrader 5, BTCUSD, Weekly – Data range: from 11 July 2019 to 1 May 2020, accessed on 1 May 2020 at 8:35 pm BST. Please note: Past performance is not a reliable indicator of future results.
The red vertical lines show the previous halvings. It’s clear to see the volatility that has gripped bitcoin, and the rest of the cryptocurrency market, since 2018. However, the price has still managed to stay above its weekly 200-period moving average, suggesting the market may continue to go higher. This indicator is often used as a confirmation of the overall trend.
With Admiral Markets you can trade on cryptocurrency CFDs (Contracts for Difference). This means you can speculate on the price direction of a cryptocurrency like BTCUSD without owning the underlying asset. Many traders will often use this product to speculate on the price of BTCUSD on the daily chart and lower due to the historical volatility of the market.
Below is the daily chart of BTCUSD. With Admiral Markets you can also trade BTCEUR.
Source: Admiral Markets MetaTrader 4, BTCUSD, Daily – Data range: from 7 December 2019 to 11 May 2020, accessed on 11 May 2020 at 12:20 pm BST. Please note: Past performance is not a reliable indicator of future results.
On the daily price chart of BTCUSD, it’s clear to see the short-term bullish bias of the market. From 12 March 2020, the price has stayed above its 20-period exponential moving average, meaning that buyers are in control. This could be in anticipation of the bitcoin halving.
However, over the weekend of 9-10 May the crypto did decline suggesting that those who had been building positions in anticipation of further upside may have exited and banked their gains before the actual halving. On 12 May the bitcoin halving took place but didn’t really change the overall structure of the market. Traders are still waiting for the ‘big move’, as the chart below shows:
Source: Admiral Markets MetaTrader 4, BTCUSD, Daily – Data range: from 7 March 2020 to 13 May 2020, accessed on 13 May 2020 at 1:00 pm BST. Please note: Past performance is not a reliable indicator of future results.
If the further upside is due, traders may use simple price action trading patterns to help identify turning points in the market. For example, bullish pin bars are a very popular bar or candle formations to identify a shift from selling to buying. The yellow boxes in the chart below show examples of them in the recent price action of BTCUSD:
Source: Admiral Markets MetaTrader 5, BTCUSD, Daily – Data range: from 21 February 2020 to 6 May 2020, accessed on 6 May 2020 at 6:35 pm BST. Please note: Past performance is not a reliable indicator of future results.
In these cases the market did indeed move higher, however, this will not always be the case so risk management should be an essential component of your trading strategy or methodology. Using the last bullish pin bar on 4 May, traders may have entered above the high of the pin bar with a stop below the low of it. This would result in an entry-level of approximately 8947.90 with a stop loss of 8507.6.
Trading 1 lot with a contract size of 1 BTC, if the trade triggered the entry and then hit the stop loss, the trader would lose 440.30 USD. At 5:28 pm BST on 6 May, the price of BTCUSD was trading at 9248, resulting in a profit of 300.10 USD if the trade was closed at that time.
However, if a trader left the position open trying to capitalize on any possible future gains, the trade would have been stopped out on 10 May, losing 440.30 USD, as shown below. This is why risk management and stop losses are essential in protecting your capital!
Source: Admiral Markets MetaTrader 4, BTCUSD, Daily – Data range: from 5 March 2020 to 11 May 2020, accessed on 11 May 2020 at 12:25 pm BST. Please note: Past performance is not a reliable indicator of future results.
Using the Admiral Markets Trading Calculator should be an integral part of your trading, as it helps you calculate your overall risk, profit, loss, and margin requirements, among other things. If the price does start to break through the moving average, it could be a sign that sellers are taking control but we would need the crypto price to stay below this average for sometime before we are confident in confirming a downtrend. Patience will be key, how will you be trading bitcoin during the halving?
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