Bitcoin has seen a strong 14% price increase over the past 24 hours of trading but are we getting too optimistic too soon?
The cryptocurrency had dropped by a total of over 50% in March as it fell from a high above $9,100 and crashed all the way down to the $3,920 region. Luckily, it managed to find strong support at $4,800 and has been trading above this level for the last week of trading.
The number 1 ranked cryptocurrency had been trending in tandem with the rest of the overarching economic markets over the last week of trading and has been capitulating along with the likes of the S&P500 and the Dow Jones Industrial Average as the uncertainty within the market caused by the Coronavirus continues.
This had shocked many Bitcoin bulls because they always seemed to believe that Bitcoin was a ‘safe haven’ asset which should increase during times of financial turbulence within the world. However, it is important to note that even the traditional safe-haven assets such as Gold has also been tumbling in this recent period of uncertainty.
Over the past few days, an interesting theme has started to develop. Whilst the major indexes continued to drop lower, Bitcoin managed to find a period of brief stabilization as it moved sideways. In yesterday’s trading session it had even started to increase which has caused many analysts to suggest we have finally ‘decoupled’ from the rest of the economy. You can see this in the chart below;
We can see that Bitcoin (orange line) was pretty much following the drops set out by the S&P 500 (purple line) throughout the month of March. During this time, Bitcoin went on to drop by as much as 32% from the 2020 opening price and the S&P 500 went on to drop as much as 25%. However, whilst the S&P 500 was making lower lows over the past week, we can see that Bitcoin stabilized and went on to increase today to reduce the 2020 price decline to just -13% whilst the S&P 500 decline remains at -25%.
It would be great if Bitcoin has in fact decoupled from the economy as this was the intention of Satoshi Nakamoto when he created the cryptocurrency. However, there are some technical indicators and levels of resistance that could suggest that this is just a brief period of relief and we are still likely to head further lower over the coming days - we will discuss this in the analysis below.
What Pushed Bitcoin Lower?
Of course, the looming Coronavirus pandemic fears created a period of “risk-on” within the wider markets and this is the largest driver for the recent price declines. Investors are uncertain about the future of the economy so they decide to remove their investments from the market as they elect to hold cash. At this moment, Cash is literally King.
Remember all the Institutional investors that were slated to be driving the price of Bitcoin higher? Well in this risk-on scenario, they would be pulling their money out of Bitcoin to be able to fund other margin calls on more traditional assets. This theory has pretty much been confirmed as exchanges started to receive large inflows of Bitcoin in the days prior to the market dump. The majority of these exchange flows (70%) seemed to be from transfers that ranged between 10 and 1000 Bitcoin which shows that the market movement was largely driven by deep pockets rather than your everyday retail investor.
Another reason for the huge mega dump was the overwhelming amount of liquidations that were witnessed on the BitMex exchange. This backlog of liquidations even caused BitMex to go down for “maintenance” as over $750 million was liquidated in a matter of minutes. This long squeeze came because traders were incredibly bullish on Bitcoin which caused them to open an unprecedented number of long positions at high leverage. Of course, when the market started to drop, these long positions slowly started to unwind causing the market to drop further due to the “long squeeze”.
Are We Getting Too Optimistic Too Quickly?
I am sure many of you have seen this famous log chart which investors often use as a case for Bitcoin to head toward the $100,000 level;
Well as you can see on the chart above, Bitcoin actually fell beneath the ‘log curve’ for the first time ever which is an extremely worrying sight. Although Bitcoin has rebounded today, this indicator could actually be telling us a whole lot more than many would like to believe. The candle still has 2-weeks to close, however, it does look like a pretty certain drop beneath the log curve and this could be a sign that Bitcoin may continue to struggle over the following months.
On the other hand, Bitcoin could just as easily climb back above the log curve and we could forget this turbulent period in Bitcoin’s history in the lead up toward the next Block Halvening.
Let us take a look at the market and highlight some levels of strong support and resistance moving forward.
Bitcoin (BTC) Price Analysis
BTC/USD - DAILY CHART - MEDIUM TERM
What Has Been Going On?
The size of the recent price capitulation becomes immediately apparent after taking a look at the daily chart above. The cryptocurrency started the month of March by dropping beneath both the 100-day and 200-day EMA’s as it headed toward $8,000. This was the first wave of drops created by uncertainty within the economy as Coronavirus started to spread throughout Europe.
Bitcoin managed to hold steady at around $8,000 until the major 40% market wipeout came on March 12th which caused Bitcoin to collapse beneath support at $7,000, $6,000, and $5,000 until additional support was reached at $4,800. The support here was provided by a 6-month-old descending trend line and a short term downside 1.272 Fib Extension.
We can also see that on the following day, March 13th, Bitcoin fell even further lower but managed to rebound from support at $3,922 (downside 1.618 Fib extension) and close back above $4,800.
Bitcoin then went on to stabilize above $4,800 and traded above the $5,000 for the majority of the past week but struggled twice to break above resistance at $6,000.
Well, Bitcoin managed to break above this $6,000 resistance yesterday as it surged higher to reach the resistance at $6,790. It broke the first level of important resistance at $6,445 provided by a bearish .382 Fibonacci Retracement level that is measured from the February 2020 high to the March 2020 low.
Where Can We Go From Here?
IF we would like to see Bitcoin continue to climb further higher we must see the market breaking above $7,000. This will be a crucial level to break to see any form of medium-term recovery within Bitcoin.
Above $7,000, additional resistance is located at $7,225 (bearish .5 Fib Retracement), $7,570, and $8,000 (bearish .618 Fib Retracement).
On the other hand, if the sellers step back in and push the market lower, the first 2 levels of support are located at $6,445 and $6,000. Beneath this, support can be located at $5,750, $5,500, $5,140, and $5,00. Beneath $5,000, additional support is found at $4,800 (downside 1.272 Fib Extension) and then at the previous descending trend line.
If the sellers break beneath the trend line, support can be found at $4,455 (downside 1.414 Fib Extension), $4,227, $4,000, and $3,922 (downside 1.618 Fib Extension).
What Do The Indicators Show?
The RSI has now rebounded from extremely oversold conditions and has returned to the 50 level. This shows that the previous selling pressure has completely faded as the bulls and the bears battle for control over the market momentum. For a sign that Bitcoin is able to break above the critical resistance at $6,455, we will look for the RSI to rise above 50 to show that the buyers have started to gain some form of traction within the market.
The recent price jump back above $6,000 is a very promising look, especially after such a turbulent week within the market. However, it is important not to get too excited too quickly. Although it may look like Bitcoin is starting to decouple from the wider economy it could be a scenario in which Bitcoin actually is lagging behind the economy. If there are further drops in the world’s major stock markets we can expect this to spill over into Bitcoin again.
On the other side of the equation, Bitcoin was designed to be a safe haven asset that people would turn to in times of economic crisis. If the cryptocurrency can indeed break above the current strong resistance at $7,000 we might indeed see Bitcoin becoming this safe-haven asset that Satoshi had designed it to be himself.