Bitcoin Price and the Outlook for Junior Mining Stocks
It’s often the case that the most important action is taking place in a market that very few people focus on at any given moment. That happened once again.
Gold is soaring, the dollar is tumbling… Of course, only at first sight, but that’s what people are generally talking about nowadays. I don’t mean to explain why it’s actually the opposite and how the above is only a short-term phenomenon and that long-term trends and charts point to something quite different. No. I did that on Friday and on the previous days, and everything that I described in my Friday’s detailed Gold Trading Alert remains up-to-date at this time – especially given that junior mining stocks declined on Friday and gold futures are down in today’s pre-market trading.
On a side note, if you haven’t had the opportunity to read Friday’s Gold Trading Alert, I strongly encourage you to do so today.
Do you remember about… Bitcoin?
You know, that e-currency that was supposed to become the mainstream payment method that would give the power back to people, but instead became the inspiration for government-regulated/controlled cryptocurrencies that would effectively give The Powers That Be even more control.
Let me remind you of what I wrote about it several months ago. Quoting my November 23, 2022 Gold Trading Alert:
Remember when I previously commented on the link between juniors and cryptocurrencies? What I wrote back then was particularly important with regard to the less known (obscure?) ones with a shady background. In fact, some even call them “shitcoins.”
I wrote that for many individual investors, cryptocurrencies became the “new precious metals market.”
Alternative payment system? Just like gold, right?
There’s a flagship asset (gold, Bitcoin).
There’s a less expensive but obviously more useful asset (silver, Ethereum).
There are a number of little-known assets that are risky but have the potential to provide massive returns (high-quality mining stocks, low-quality mining stocks, especially low-quality junior mining stocks, altcoins, or "shitcoins"). While gold was not doing much, the wild rallies in cryptos got much more attention. That was finally exciting!
So, individual investors flocked from the precious metals market to cryptos. Not all investors, of course, but many.
While cryptos were on the rise and the overall sentiment was positive, investors dropped their PM holdings to buy cryptos as they forecasted that the latter would continue to rally “to the moon.” And while it didn’t matter that much for gold, as the yellow metal has powerful buyers and sellers that are not interested in cryptos, it mattered a lot to the junior mining stock sector as the buying power waned.
Fast-forward to the current situation, every other day we hear or read about yet another crypto scandal, while prices of cryptocurrencies are declining sharply.
This means that the above-mentioned effect could have been reversed. The investors who moved out of the junior mining stock sector in order to get into cryptos (in particular altcoins) could now be aiming to get out of that market (people tend to sell on declines. In fact, that’s why declines happen in the first place) and get back to what they “had liked” before – junior miners.
This specific phenomenon can be seen from a broader point of view when one compares the prices of gold and bitcoin.
As I wrote, the link is likely stronger in the case of altcoins and juniors, but gold and bitcoin have price data that’s more comparable, so that’s what I’m going to analyze.
Even though both gold and bitcoin moved higher between 2014 and now, they quite often moved in opposite directions in the short run. Short-term bottoms in gold, in particular, were usually followed by (larger or smaller) declines in bitcoin.
Interestingly, I originally featured the above chart many months ago, and please note that this tendency worked like a charm recently.
Gold formed a short-term bottom, rallied, and now Bitcoin slides. Why? Probably because people were fed up with Bitcoin’s inability to hold its ground, while gold soared. So they flocked to gold, silver, and - probably most intensely so - to junior mining stocks.
All right, so does this mean that as Bitcoin slides into the abyss, junior miners are now going to soar?
No market moves up or down in a straight line, right? Well, neither does Bitcoin. How low is too low, then? That’s where technicals come in.
Remember when I wrote that Bitcoin was topping at about $50,000? Well, it did move a bit above that, but it didn’t trade there for long.
The flagship crypto fell like a stone in water, and it did so in tune with the technical principles. Bitcoin formed a bearish head and shoulders top pattern, and after breaking below the neck level earlier this year, it then corrected a bit, and then it plunged below $20,000.
All this is a textbook-example of how a head and shoulders pattern should work.
Now, the size of the decline based on this pattern is likely to be equal to the size of its head. I marked that with dashed lines.
Guess what – Bitcoin just moved to this target level (marked with green) recently. That is a strong indication that the bottom has been reached. The second indication comes from the huge volume that just accompanied the decline and the fact that the decline was quite sharp. The ROC (rate of change) indicator at the top of the above chart is close to -25 and when this happened and bitcoin was after a huge-volume decline, it then rallied.
What is even more interesting is that those were also the times when gold declined.
The sentiment itself is the final indicator that a short-term (!) bottom for bitcoin is in or near. Just go to any news website and look at what is being written about Bitcoin – it’s all scary and bearish. Or at least the majority of news/articles. That's what happens when prices fall to their lowest point. Remember what was written on those same pages when bitcoin was trading above $50,000? It was all sunshine and rainbows. All this time, I warned about the incoming slide. Very few listened then, just as very few want to hear about the upcoming slide in junior mining stocks.
Anyway, here’s how frequently people search for “crypto scam” on Google (chart courtesy of Google Trends).
The other distinctive peaks in those searches were in May 2021 (a major top and major decline in Bitcoin), early November 2021 (a major top in Bitcoin), and the end of January 2022 (a major bottom in Bitcoin).
The interest was this high only when there were major turnarounds in Bitcoin. And since it’s crystal clear that the previous move in Bitcoin was to the downside, it can’t be a top. Therefore, it’s likely that there’s a major bottom in Bitcoin.
Now, why am I bringing this all back today? Because just as it seemed likely that Bitcoin would bottom back then (and it did! It turned out that I picked the Bitcoin bottom very accurately), it seems that the BTC has just topped right now. And if not, it’s in a topping pattern.
Why would I think that this is the case?
Because of three reasons.
The first reason is purely technical. After a sizable short-term rally, bitcoin approached its very strong resistance level in the form of the mid-2021 bottom. That was the level that stopped the decline in mid-2022 (only for a while, but still), and it also stopped the corrective downswing in early 2021. Reaching this level is – on its own – a good reason to think that the move lower is about to start. However, it’s more of a precise price level of a turnaround than the real reason for the price to move south again (evidence that the market really wants to move in the opposite direction).
The second reason is somewhat between being precise and being imprecise, but supportive of the overall tendency to head south. It’s the shape of the price move itself. The rally took the form of a zigzag, which is common during corrective upswings.
The third reason is not precise at all, but it’s an overwhelming force that affects all markets. And it’s what I’ve been writing about for quite a few days now. Namely, it appears that it is the investment public that is entering the market right now – or it has already entered. As a reminder, assets with weak fundamentals / outlook but low prices tend to be bought excessively by people who don’t analyze them but rather buy them because they are cheap (without considering that they might be cheap for a good reason).
A few years ago, it seemed that Bitcoin had great fundamentals – like gold, but better because it was less bulky, not so old-fashioned, etc. But now? With governments ready to take over this market, it’s only a matter of time before some sort of crypto is used officially. Is there a good reason not to ban Bitcoin transactions then (from the governments’ point of view)? And it would be really easy to do so, too. It’s not gold that you can hide, right? Do you think that people owning Bitcoin in Ukraine had an easy time exchanging it for necessary goods? Without things like… electricity?
So, yeah, the fundamentals are not as positive as they used to be. And more precisely, they are exactly as they were previously, but some things were not as clear as they are right now (governments taking over the landscape).
- But PR! You were generally right about Bitcoin’s top, you were on the spot about its bottom, and you might be right about this top, too. But why are you telling me this? What does this have to do with junior mining stocks?
Quite a lot.
You see, previously, Bitcoin, other cryptos, and in particular, less-known altcoins (a.k.a. “shitcoins” – ok, I admit, I laugh at least a little when I’m reading this word) were seen as something “alternative” to junior mining stocks and the precious metals market in general.
However, as time went on, it seems that they all started to be viewed similarly. No wonder – as it turned out that cryptos are not the “perfect asset” that only goes up in value, it became obvious that one might need both for the same purpose of hedging against fiat currencies’ demise: precious metals and cryptos. Therefore, cryptos became more “like PMs” instead of their “new, alternative version”.
It's easier to show what I mean on the chart. In fact, the important – for us – implication is right there, anyway.
The key thing is this: the tops in Bitcoin align with or slightly precede the tops in the GDXJ. This is especially the case when the RSI for the GDXJ is close to 70.
Both apply right now! The RSI is close to 70, and bitcoin – as I wrote earlier today – appears to be topping.
I used vertical, golden lines to mark tops in Bitcoin and in the GDXJ, and I used the black, dashed lines to show you the difference between the timing of tops.
The interesting thing right now is that Bitcoin formed an initial top several days ago, and this is the second top that we’ve seen. If we count the first top as the real one, then the delay between that top and the most recent GDXJ top is in tune with the previous delays. Therefore, it would be likely that the top is in from the GDXJ-Bitcoin link point of view.
However, it seems most likely – at least from my point of view – that we can treat the recent double top in Bitcoin as something similar to what we saw in late 2021. The second top was also slightly higher back then. And the GDXJ also moved higher, while Bitcoin moved just a little over the previous top. That mid-November 2021 top was the final top – and it was followed by a sharp decline. The same appears likely also this time.
All in all, while I covered the most important points regarding junior miners, other miners, gold, silver, stocks, and the USD Index on Friday, it turns out that the top in junior mining stocks appears to be in or at hand, also when taking Bitcoin into account.
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Przemyslaw K. Radomski, CFA