Weekend trade returned the Bitcoin Price to the lower trendline of a channel that previously contained wave action. Price action is animated but awaits Monday trade to set direction.

Todays analysis takes a long-term view to try and put expectations in perspective.

Weekly Bitcoin Chart

Mt.Gox

Notice how, at inception, price spikes out in an expanding triangle formation that pivots around $0.06 before embarking on its first decisive wave of advance (wave I ). The June 2011 high around $30 coincides with the starting point of the BTC-China chart shown next.

BTC-China

Conveniently, BTC-Chinas price history includes the high near 170 CNY ($30). The subsequent price action is assumed to be a continuation of the Mt.Gox chart above.

Notice the Elliott Wave count that is implied by the channel drawn on this logarithmic scale chart. Other counts are possible, and with additional wave action may still prove more fitting. However, the self-evident count contained in the largest channel is a textbook specimen of the Wave Principle. Readers unfamiliar with Elliott Wave Principle can learn more at Elliott Wave International for now lets assume that the Bitcoin price advance in this chart will unfold in five waves (and that downward corrections consist of either three or five wave structures). If the count is correct, we are currently in wave IV .

Until two weeks ago, it had appeared that the eight-month long decline was over. Specifically, three waves (A, B and C ) of correction had completed. The speculative waves D and E were possible but ambiguous. Notice, also, the sub-channel (annotated with a dotted red line) and its significance as support/resistance in the past. With wave E reversing away from this trendline, at the red dot, the supportive function of the trendline capitulated. This was one of many pieces of evidence in favor of advance starting from the $460 price level.

However, during the past week price action has decisively dropped below this historical support. Despite oversold indicators and a multitude of technical factors emphasizing compound diversion, decline resumed with much downside hunger. So, where does that leave us? There are two major scenarios.

Worst (and Best) Case Scenario

The Bitcoin price continues decline, in wave IV. to the lower channel trendline around $200. This scenario is plausible, especially in the light of the Mt.Gox chart at the top of the article. As the Mt.Gox chart surrendered altitude like a lead Zeppelin from the top of wave III to the bottom of wave IV. it had made the exact same journey this scenario proposes. Notice the indicators in the Mt.Gox chart with their extreme reverse diverged condition. And price? Price stopped falling exactly at the lower channel trendline. Although no-one could be sure that they would get their money back, participants kept trading via the doomed exchange, and the market clearly felt $90 was a good buy level even for irretrievable bitcoins.

The Mt.Gox chart shows us what the current chart may look like in the coming days and weeks and what the outer extremes of indicator divergence are. It is possible, and the implication is cheap bitcoins to ignite the upward trajectory of wave V to a Bitcoin price top near $1,750 .

The Burden of Not-Knowing Scenario

Equally possible is that price rallies on Sunday night through Monday and climbs atop the critical dotted red trendline (currently cutting through $470 ) only to perch there like some precarious terrestrial bird. The whales would have failed to get their decisive low, and the wave count remains incomplete as has happened in the past. This scenario is possible, but undesirable from the point of view that it does not allow confident trade. The fundamental uncertainty of speculating in historys most exaggerated commodity returns.

The exciting aspect of this scenario is that it would invalidate the wave count annotated on the chart and raise the upside potential for the Bitcoin price by several exponential magnitudes possibly into the $10,000s. However, well cross that bridge when we get there because a worrisome tendency (discussed next) might preclude it.

Bitcoin Regulation Be Careful What You Wish For

Several readers and cryptocurrency writers have recently resurrected the spectre of Regulation. This is not a direct criticism of any of the aforementioned, but, instead, a general criticism of both the notion and the practice of regulation, and why it is undesirable .

Stable Currency. Where?

The first motivation, evident in appeals for regulation, is that the Bitcoin price is too volatile. The assumption made in this statement is not clear, but it seems related to the concept of stable currency. Of course, the idea that stable fiat currencies even exist is arguable just look at the weekly forex charts, for example. That there is any semblance of relative stability is a result of the actions of large bank market makers and frenetic central bank manipulation rather than a consequence of or the presence of regulation.

Effective Regulators. When?

I would like to point readers to a recent documentary film entitled Inside Job .

The director uncovers the role of establishment regulators as the culprits responsible for the 2008 global economic meltdown. The personalities involved are the same ones occupying current decision-making positions in the Fed, in university Economics departments, and in so-called parastatal regulatory bodies such as the SEC. CFTC, etc.

Bitcoin community members should consider that popular sentiment in favor of regulation is a bear market phenomenon. During the euphoria and positive mood of a bull market rally, regulation is far from everyones mind especially those who are charged with the actual job. Instead, they use their position (as regulators) to do large market players (institutions such as banks and investment funds) big favors, in exchange for sizeable kick-backs. This phenomenon of free market economics cannot be proven ever to have not been the case. Bitcoin is currently free from this subversive influence .

Fancy Titled Crooks. How?

Calls for regulation, by the public, is good-intentioned and appeals to the principle of oversight whereby wrong-doing and manipulation can be prevented. However, in reality, those who end up doing the regulation are already in the pocket of those who stand to be obstructed by the regulation.

Satoshis Design Avoids Regulation

Satoshis Bitcoin can exist without government decree or Wall Street regulation. Its designed to exist and function in perpetuity and without some establishment type in an expensive suit having a say-so. Satoshi designed Bitcoin to function as a payment system. as a store and transmitter of value and as a market instrument. In fact, the built-in Contracts capability of Bitcoin, that is only now being explored, promises to make the cryptocurrency even more valuable and more volatile, as a result.

Self-Regulation

A correct understanding of markets and what drives them irrational as they may appear reveals the truth: Markets have always been, and will always be, intrinsically regulated by social mood. The empirical proof of this internal market mechanism is in the Elliott Wave Principle as manifest in the weekly charts shown above. Every chart in the history of markets testifies to the fact, irrespective of whether a particular instrument was regulated or not.

Instead of passing the responsibility of oversight to some Ivy League gang of crooks, Bitcoin users and investors should take responsibility for their own assets Bitcoins protocol design makes it trivially possible. Use exchanges who can show you their books. Opt for those exchanges that are transparent about their reserves. Insist on having an exchange wallet that is secured via multi-sig. Where is the need for regulation then? What more will regulation do for you or for Bitcoin. Own it and take responsibility for it else you dont deserve it.

In the past two months Kraken. BTC-China. OKCoin and Huobi have all submitted to reserves audits. Both BitFinex and Bitstamp have passed Proof of Solvency audits great to know theyre solvent but lets try a bit harder, eh? BTC-es finances remain as mysterious as their physical and email addresses. Meanwhile, Huobi is able to offer users a multi-sig secured wallet which should make the choice easy for any user wanting both Proof of Reserves and theft-proof bitcoin storage.

Summary

Additional decline seems certain. Advance to above the long-term trendline (dotted red in the weekly charts above) can change this prospect. The decline target is currently below $300 and possibly near $200. This prospect represents a buying opportunity for the brave and those with high risk appetite. If the wave count shown above is confirmed by price action, then traders and investors can expect another wave from near $200 to near $1,750. With sufficient leverage and good fortune in timing, the final wave of advance for this wave cycle should be sufficient to generate substantial profits in the coming months. My personal strategy is to hold dollars on the way down and to systematically switch into an all bitcoin balance as price approaches the lower channel trendline .

Current Bitcoin Price Chart

At present Bitcoin price action is ambiguous with two possible price paths visible in a similar previous wave position:

Economic Data and Announcements This Week

The following data indicators will have an impact on the markets during the coming week, and are also expected to have a bearing on sentiment towards Bitcoin .