Has bitcoin found a floor? That’s the question on everyone’s mind after seeing the cryptocurrency’s price more than halve to $30,000 in six months.
Unfortunately the answer is no, according to some technical patterns that look extremely similar to ones seen ahead of the 40% price crash in the second half of November 2018. Remember, back then the price had been consolidating over the year following a steep drop from its previous all-time high just under $20,000 in December 2017.
On the three-day chart (see below), where each candle represents 72-hours, the 50-candle simple moving average (SMA) has crossed under the 200-candle SMA, confirming the so-called death cross, a bearish indicator.
At the same time, the EMA ribbon, a group of short duration and long duration exponential moving averages, has crossed bearishly under the 200-day SMA.
These ominous crossovers last happened around Nov. 12, 2018, when bitcoin ended its multi-month consolidation near $6,000 and resumed the broader bear market, falling to $3,500 by the end of the month. Additionally, there was not major macro or extraneous factor that led to this drop.
Therefore if history is a guide, bitcoin’s bear market may deepen in the coming weeks.
The cryptocurrency has been mainly consolidating between $30,000 to $48,000 since late January, barring a very short-lived drop to $25,338 early this month. At press time, the cryptocurrency is trading around $30,000, which acted as a floor in mid-2021.
The macro factors appear aligned in favor of the bears as central banks are withdrawing liquidity to fight inflation. As of today, the Federal Reserve’s (Fed) is in the early stages of the tightening process and is scheduled to start shrinking its balance sheet in June. In November 2018, the Fed’s tightening cycle was in its final stages.
Additionally, sophisticated traders are positioning for a deeper decline, options market data show.
Bitcoin risk reversals, which measure the implied volatility premium for calls or bullish bets versus volatility premiums for puts or bearish bets, are firmly negative, according to Swiss-based data tracking platform Laevitas. In other words, demand for puts (sell options) is stronger than calls (buy options) across all timeframes.
Savvy traders typically buy puts to protect long positions from a price drop. Speculators also buy outright puts to profit from an expected drop. As per technical analysis chart, major support is seen around $20,000 – the high recorded during the previous bull cycle. On the higher side, the Jan. 22 low of $32,933 is the level to beat for the bulls.
Whether history will repeat itself and how low bitcoin can go is anybody’s guess. As they say in financial markets, past performances are not a guarantee of future returns. And more importantly, technical analysis is subject to private interpretations. However, there are clear indications that bitcoin may not have reached its bottom.