Traders have had to learn to navigate bear markets in the past. The traditional set of indicators that identify good entry points is not able to predict the length of a crypto winter.
Bitcoin’s (BTC), recent rebound above the psychologically significant price level of $20,000 was a signal to traders that the bottom was in. However, a deeper dive into data suggests that the short term relief rally may not be sufficient evidence of a macro-level trend shift.
A recent report from Delphi Digital, a cryptocurrency research firm, emphasized the need for caution. It stated that “we need more pain before [we] have confidence that a market bottom has been reached.”
Although Bitcoin’s peak price in November was a painful one, the comparison between the pullback and the 2017 top market prices suggests that there is still a possibility for further decline in the near-term.
BTC/USD price has been normalized since the all-time peak (Current vs. 2017, peak) Source: Delphi Digital
BTC’s price fell approximately 85% between its peak and the bottom during previous bear markets. Delphi Digital claims that if the past were to repeat itself in today’s environment, it would result in a “low just above $10,000” and a 50% decrease for current levels.
Ether (ETH), which has seen its price drop by 95% between peak and trough in the bear market, is now facing a grim outlook. If that happens again, Ether’s price could fall to $300.
Drawdown in ETH/USD Price Percentage (current vs. previous ATH). Source: Delphi Digital
Delphi Digital said,
“The risk of experiencing a similar crash again is greater than most people think, especially if BTC stops supporting the $14K-16K range.”
Conditions are too high
Data shows that traders who are trying to find the bottom of the market have found the data. “Previous major market bottoms” were associated with extreme oversold conditions.
The weekly chart below shows that BTC’s 14 week RSI fell below 30 for just the third time in its history. Two previous instances were close to a market bottom.
BTC/USD weekly rate vs. 14 week RSI. Source: Delphi Digital
Some may interpret this as a signal that it is now a good time for reentry to the market. However, Delphi Digital cautioned those who expect a “V-shaped recovery” by noting that in the previous two instances, BTC traded in an unstable sideways range for many months before finally undergoing a strong recovery.
The 200-week simple moving mean (SMA), raises questions about whether the historic support level will be maintained.
BTC/USD Price vs. SMA 200-week and RSI 14-week. Source: Delphi Digital
Bitcoin broke the 200-week SMA recently for the first time since March 2020. BTC has traded below this level only for a few weeks in the past bear markets. This suggests that there is a bottom.
Related: Bitcoin prices fall below $21K, while exchanges experience record outflows
The market is looking for the last capitulation, which historically marks the end of a bearish market and the beginning of the next cycle.
Although the market sentiment is at its lowest since March 2020’s COVID-19 crash, it hasn’t reached the same depths of despair as in 2018.
“We might need to see some more pain before sentiment really bottoms.”
Crypto Fear & Greed Index. Source: Alternative
Although the weakness of the crypto market is evident since 2021’s end, the true driving forces behind market collapse are runaway inflation and rising interest rate.
BTC/USD vs. Fed Funds Rate vs. Fed Balance Sheet. Source: Delphi Digital
Market corrections are often followed by rising interest rates. Given that the Federal Reserve plans to keep hiking rates, Bitcoin, and other risky assets, will likely correct further.
The percentage of BTC supply that is in profit during bear markets is one final indicator that there needs to be a capitulation event. It was at a low point of 40%.
BTC/USD Price vs. Percentage of Supply in Profit Source: Delphi Digital
According to Glassnode data, this metric currently stands at 54.9%. This adds credibility to the view that the market may still experience another leg down, before the true bottom is in.
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