The Falling Knife Analogy Doesn’t Work for Bitcoin: Trader Talk

• It surprised me earlier this month, when Bitcoin had its worst two-day run since May, that sales desks barely mentioned the moves. Asking around fiat-currency desks, the feeling was regulatory issues will weigh on the crypto space for long and that it’s simply a high-beta asset rather than an inflation-hedge for now. And as one put it, it’s another falling knife you don’t want to catch. But is that really so?
• Certainly, Bitcoin’s moves lately tend to follow the market’s overall sentiment closer than before. The 90-day correlation with the S&P 500 index is at its strongest in 13 months, which is significant given the currency hasn’t been a on one-way street like U.S. stocks this year. And it’s no news that tougher regulation is coming, yet last week’s Congressional hearing on crypto shows there is good will from both sides to find some common ground. As Bloomberg Intelligence’s Mike McGlone put it, “increasing dollar dominance through digital tokens, jobs, votes, plenty of revenue (tax) and risks of falling behind are the top reasons we expect the U.S. will embrace crypto assets with proper regulation.”
• Yet I couldn’t help but rant on the “falling knife” proposition. Undeniably, an almost 40% drop in less than four weeks is no simple move even for an emerging-market currency. Thing is, for Bitcoin, maybe you can catch that falling knife because price action back in 2018 is a long distant memory. At the time, not only did Bitcoin fall 70% within the first weeks of the year but also failed to catch any meaningful bid, taking its losses to 84% by mid-December. Since then, it has risen by 2,000%.
• And amid this remarkable advance, there have been similar pullbacks to the latest one. Since early 2021, the world’s largest cryptocurrency has had drops of 31%, 26%, 27% and 50%, each time within a matter of few weeks and each single time, it’s reached a fresh cycle high soon after. There’s no way to tell whether the latest 39% drop means the asset will climb above $70,000. But what we can say is that treating Bitcoin like a traditional asset isn’t always prudent.
• The biggest difference is that one didn’t have to find the bottom in each of those drops to realize a significant profit. Certainly those that talk of bubbles would argue that a portfolio adding in dips will just fail to survive eventually. But for now, Bitcoin’s price action suggests otherwise.
• For more traditional assets, technical analysis serves you well when trying to identify the reversal point in a big, sudden drop. In the past two years, it can also be very helpful for cryptocurrencies as well, and not just because a large part of the market that trades cryptos relies on techs. The key point is to know how to use it because there is no single magical indicator to rule them all.
• And probably momentum indicators and the like can assist in entering trades prior to the decisions by the Fed, the European Central Bank and the Bank of England, be it in currencies, fixed income or equities. These may be the last real trading days of the year, so let’s only use the tools we truly understand.

Vassilis Karamanis is an FX and rates strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice