'Things are going to get pretty scary' in Bitcoin

'Things are going to get pretty scary' in Bitcoin

- Coming off its best week in three months, Bitcoin is giving back some of its gains, with strategists flagging a drop below a key trendline that typically portends further weakness.

Bitcoin has declined from the recent highs it reached just last week, dropping roughly 6% since Friday. The decline has pushed it back below $40,000 and the coin is currently trading within its January range of $358,209 as of 12: 31 p.m. at $38,209 in New York City.

Bitcoin has also retreated below its 50 day moving average - a medium trend line followed by chartists - and may see additional weakness until its 100 day moving average support around $34,773.

It had become overbought this weekend, so it might just be working off that condition before it bounces back and takes out the high of this weekend's stockpile, said Matt Maley, chief market strategist for Miller Tabak Co. 'That would be very bullish. In other words, the actions in Bitcoin over the next week or so will be very important.

Some strategists say Bitcoin's decline is just a regular pullback after it rallied strongly at the start of last week. Supportive comments from billionaire Elon Musk and Ark Investment Management LLC's Cathie Wood, as well as speculation over Amazon.com Inc.'s possible involvement in the cryptocurrency sector had helped it rally.

If 'I bounce back it is going to feel quite bullish, said Maley. 'If it sees much more downside follow-through, things are going to get pretty scary pretty quickly.

Bloomberg crypto index, which tracks some of the major cryptocurrencies, lost as much as 4.3% on Tuesday.

In recent days, cryptocurrencies have also become a focus for regulators - a fresh push by Congress to require crypto brokers to report transactions to the Internal Revenue Service could create some unwelcome tax bills, Bloomberg News reported this week.

The new rules - part of the $550 billion bipartisan infrastructure package now being considered by Congress - would also force businesses to disclose trades of digital assets of more than $10,000. It is all meant to raise $28 billion. Still, supporters of digital assets cheered the development, saying clearer rules from policy makers could potentially strengthen the industry in the long run.

Read more: Crypto Investors Get Ready for Clearer Taxes But More Rules?

While Bitcoin is extremely volatile and its percentage moves are outsized, it often forms identifiable technical patterns, says Frank Cappelleri, a desk strategist at Instinet. The coin's huge move higher from 2020 to April 2021 was born from a single-month bottoming formation and from then on, Bitcoin broke out, consolidated, formed new patterns and had gained momentum until momentum completely dissipated.

Whenever the next up leg begins, a similar chain of events can have to occur again, he said. The recent breakout attempt via $40,000 didn't encourage upside follow-through, the consolidation since May has created a potential bottoming formation. That scenario will remain a possibility if Bitcoin is able to etch out a lower low compared to its July low point in Bitcoin.