Bitcoin slips below $40k. Incoming Bear Market?
Bitcoin increasingly under pressure: prices fall below the important $40k level triggering panic in the markets. Are we close to the end of this bullish cycle that started in late 2020? Let's try to make a local mind and analyze the situation of the king of market in a medium to long term perspective.
Bitcoin Price Drop Analysis
Observing Bitcoin on the daily time frame, it is easy to notice how since November the 10th of 2021 it started to reverse its bullish trend, with a drawdown from the historical highs equal to about -50%. Prices, at the time of writing (25/01/2022) equal to about $36,000, are below the 10-period exponential moving average. The death cross between the EMA 50 and 200, which occurred around mid-January 2022, has given a further downward thrust to the already existing trend not very lively.
In short, the situation does not seem to be the best. However, the bears may soon run out of steam! There are 6 main reasons for such veiled and slight optimism:
- Fear and Greed Index
- Bitcoin Reserves at historic lows
- Bitcoin Hash Rate at an all-time high
- Heatmap of the price distance from the 200-week moving average
- Open Interest at high levels
- Relative Strength Index (RSI) oversold
Let's see them one by one...
Fear and Greed index
The Fear and Greed Index marks a level ofextreme fear in the markets, which usually indicates a buying opportunity, rather than an opportunity to permanently liquidate long positions. Generally extreme fear or extreme greed signs a favorable point for a sharp reversal of the prevailing trend.
Bitcoin Reserves at an all-time low
As of late July 2021, we have seen a further Reduction in Bitcoin Reserves on the Exchanges. Encouraging signal to the market, which did not disappoint expectations by recording a significant price increase since August. Once hitting an all-time high in November, Bitcoin felt the selling pressure from the bears. Despite this, reserves on exchanges did not increase, but rather stayed stable, with a trend towards distribution.
Bitcoin Hash Rate at an all-time high
Despite the strong dump, the Bitcoin network appears stronger than ever, with very high hash rate levels. Remember that the hash rate, calculated in hashes per second (or indeed tera hashes per second) identifies the computational power of the network, and therefore its resilience to attacks against the network. All this serves as a reminder that the fundamentals are stronger than ever, and while prices reflect short-term dynamics, other factors such as the hash rate, concern effects that can only be observed on a large scale.
Headmap of the 200-period moving average on the weekly chart
This indicator is used by long term traders to identify approximate values which identify the end or the beginning of a bullish cycle. These values are grouped by a heat map which identifies with warm colors the prices related to the top of a bullish cycle and with cold colors the prices near the bottom. From the chart it is easy to observe that the peaks of the previous cycles (2013-2017) are at a level farther away from the 200-week moving average than the current ones. This could mean that this long bullish cycle that started in 2020 is not yet completely finished.
Open Interest on high levels
Open Interest continues to remain at high levels, underscoring a massive use of financial leverage on Bitcoin positions. In this scenario, the desire of traders to push the prices down by using derivative instruments to "amplify" the size of their trades prevails. Usually when the open interest reaches an elevated level there is a squeeze in the opposite direction to the short term trend with a consequent cascade of liquidations. An example is what happened in May 2021 with a long squeeze, i.e. with a bearish direction, which caused huge losses to traders who were positioned long. The heavy entry in the market of important institutional players could provide the necessary push for a short squeeze.
Relative Strength Index (RSI) Oversold
The Relative Strength Index reveals an oversold level. Usually this indicates a buying opportunity or at least a situation in which the selling pressure is exaggeratedly high with a strong probability of a rebound. The RSI on a daily time frame registers a value below 20, something that has not happened since March 2020.
Final comments The intention of this article is absolutely NOT to unbalance our bullish forecasts, but rather to analytically report some indicators that show us that the long-term situation is not yet compromised, at least from a strictly technical point of view. If we analyze the situation in the short term, the trend is clearly bearish, but if we widen our views, the outlook does not seem to be so bad. In any case, do not panic! Strong dumps like these have been there in the past and will almost certainly be there in the future, but those who believe in Bitcoin (and especially know it!) and its technology, know that they have nothing to fear!