Morning Comment: Bitcoin...vulnerable to a drop to $41K?


The capital gains tax proposal that was put out by the Biden Administration knocked-down the stock market yesterday afternoon, but it was hardly a disaster. The decline came on breadth that was benign….and even though volume did increase, it was still only 2.8bn shares on the composite volume. Therefore, the drop was not something that left people shuttering throughout Wall Street.

Besides, the news on the capital gains tax was not a big surprise. It was just the fact that the proposal included an extra kicker on those making over $1 million a year that caused the hiccup. No, people are not overly concerned about the “economic hardship” those people will face. The concern came from the fact that the starting point for the Administration is higher than the Street was thinking. Therefore, this signals that Administration’s real target level is higher than was previously thought…….Either way, this is not something that is going to break the back of the bull market for stocks in-and-by-itself.

The news on this issue did, however, have a bigger impact on Bitcoin. This makes a certain amount of sense. A lot of people have HUGE gains in Bitcoin and other cryptocurrencies. Therefore…assuming that the proposal is not passed until next year…these investors will want to take some profits on at least SOME of their holdings this year. Even those who think this Bitcoin is going to rally well into the six figures over the next few years…would have to seriously think about taking SOME profits…if their gains are going to be taxed next year at a rate that is double that of what it will be taxed this year.

To be honest, it’s going to take (at least) many, many months for us all to determine what the tax rate will be in the final proposal…so it could end-up being a much, much lower rate. However, with investors already worrying that last week’s Coinbase direct listing was a “sell the news” event, this tax proposal is definitely something that is having an impact on the cryptocurrency asset class right now.

Bitcoin is trading just below the $50k level as we write. That obviously means that it’s trading below the key $52k support level we’ve been highlighting recently. HOWEVER, that number is the “closing” low from late March, so we cannot get overly bearish too quickly. Bitcoin could obviously bounce-back above that level by today’s close, so we’ll see how things playout over the rest of today’s trading. While using that caveat, we also need to point out that if Bitcoin does indeed close below $52k, it will give the cryptocurrency its first “lower-low” in 13 months…AND take it below its trend-line going back to December. (December is when Bitcoin traded above $20k for the first time…and then exploded higher of the next few months.) Therefore, it would definitely be a negative technical development on a short-term basis.

Guggenheim’s Scott Minerd said this week that Bitcoin could fall as low as $20k…saying that the froth has become extreme for this asset class. We suppose that it is possible that we could see that kind of a decline, but we believe that the $41k level will provide some very strong support…….What we’re saying is that a meaningful close below the $52 level for Bitcoin will leave it vulnerable to a further sharp decline down to $41k…but that the $41k level should be an area where the cryptocurrency finds some very strong support.

Why $41k?.....Well, that was the high that was reached in early January. That was followed by a 21% drop into the latter part of that month. So that became the key resistance level for Bitcoin. (Once it broke above that key resistance level in early February…it rocketed higher by more than 50%.) Since it was such an important “old resistance” level, it has now become the key “new support” level. On top of this, the $41k level is ALSO a Fibonacci 38.2% retracement of the entire rally from March of 2020 to early April of this year.

None of this means that Bitcoin HAS to see a decline of that consequence. However, a drop to $41k would “only” be a decline of 35%. That might sound like a huge drop, but Bitcoin has seen declines of 30% or more every year over the last decade…and sometimes more than one decline of that size! In other words, there are some people who might think that we’re being way too bearish by saying a decline to $41k is likely if it does indeed end this week with an important “lower-low.” However, we’re merely calling for is something that has been VERY NORMAL in the life of Bitcoin every year since its inception.

Therefore, we’re not calling for the kind of dramatic decline that Mr. Minerd is calling for. We’re simply saying very large setbacks for Bitcoin and other cryptocurrencies are normal…and therefore they should be expected, not dismissed. If you expect them…you can embrace them…and if you embrace them, you can profit from them to a greater degree than you already have so far in Bitcoin and other cryptocurrencies.

(If you'd like to get these unique insights during these fascinating times in the investment world, please click here to subscribe to “The Maley Report.”)





Matthew J. Maley

Chief Market Strategist

Miller Tabak + Co., LLC

Founder, The Maley Report

TheMaleyReport.com

275 Grove St. Suite 2-400

Newton, MA 02466

617-663-5381

mmaley@millertabak.com


Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.

Posted to The Maley Report on Apr 23, 2021 — 9:04 AM

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