This beginning of the week, and more generally this beginning of the year, must not start as you would have expected for Bitcoin. After dreaming for a long time of the $100K mark for the end of 2021, the price of Bitcoin has just dropped back below $40K as I write this.
A low of $39.6K has just been hit.
It's in these moments of extreme fear that you need to ask yourself the right questions. Are you scared? Stressed? Excited? Happy? Sad? Confident? Answering this question honestly will give you a better sense of where you stand in terms of your level of confidence in the Bitcoin revolution.
This weekend I was amused to see that extreme fear (Bitcoin Fear & Greed Index at 10) was dominating the market on January 8, 2022, when the Bitcoin price was $41.6K. You might wonder why I was amused. After all, watching the price of Bitcoin fall is not funny at first glance.
It is when you realize that a year ago to the day, the price of Bitcoin was also $41.6K, but the market sentiment was euphoria:
Same price, but opposite feelings. The reason? Most investors have a hard time stepping back and realizing that in March 2020, the price of Bitcoin bottomed out below $4K during the liquidity crisis at the beginning of the COVID-19 pandemic.
BTC reserves on exchange platforms are at a 4-year low. Why won't the supply shock have the desired effect on the Bitcoin price?
Seeing the price of Bitcoin move 40% below its ATH of $69K may worry you, but you should understand that this is nothing to worry about. The price of Bitcoin is not going to reach $100K (and even more in the future) in a straight line. The price of Bitcoin rises in successive waves, interspersed with corrections like the one we are experiencing now.
So there is no need to panic. Panic is even less of an issue when you see that the Bitcoin reserves on the exchange platforms are at their lowest level in four years. Some people naturally want to say:
“Sylvain, if Bitcoin reserves on exchange platforms are at a 4-year low, why aren't we seeing the supply shock that all Bitcoiners are constantly talking about?”
That's a great question, and I'll answer it. As you can see, I like to do questions and answers :).
The fact that BTC reserves are at an all-time low on exchange platforms means that there are more and more long-term HODLers. Proportionally, there are fewer buyers and sellers on the spot market. Thus, the volatility of the Bitcoin price is increased and it takes less trading volume to move the Bitcoin price in one direction or another.
The market is bigger, confidence in Bitcoin is growing, but demand in the spot market has to grow for the supply shock to have an upward effect on the price of Bitcoin.
At the beginning of this year, this is not the trend. All eyes are on the Fed, which is expected to accelerate inflections in its ultra-accommodating monetary policy with a faster-than-expected rate hike and an end to liquidity injections that will come sooner than expected.
De facto, all investors are waiting and thinking about the best strategies to allocate their funds for 2022, while the easy money conditions we have known since March 2020 are set to change very soon.
While we wait for the money to come back into Bitcoin, we can see that longs are getting liquidated and the Bears have been able to drive the price of Bitcoin down to around $40K. The good news here is that we saw an interesting bounce after hitting $39.6K. A rebound that brought the price of Bitcoin back close to $42K. This extreme fear is seen by Whales and institutional players as an extreme opportunity.
These players have a lot of faith in Bitcoin because they can take the long view. They don't just look at what the price of Bitcoin is going to do in the coming days and weeks. They think in years and decades. It is this time paradigm shift that you need to make to take full advantage of Bitcoin.
The Death Cross is here as Bitcoin price just dropped below $40K. Is it time to panic?
The fall in the price of Bitcoin leads us to the creation of a death cross on the Bitcoin price chart with a 1h-timeframe:
I recently introduced you to the 11 chart patterns you need to know to better anticipate Bullish or Bearish movements in the price of Bitcoin. I didn't tell you about the Death Cross and its counterpart the Golden Cross, because these patterns are based on the behavior of the 50-day moving average and the 200-day moving average of the Bitcoin price. This is something slightly different, and I will go into more detail in another article if you are interested.
For now, you should know that a Death Cross occurs when the 50-day moving average of the Bitcoin price crosses downward the 200-day moving average of the Bitcoin price. This is exactly what we can see on the previous chart with the 50-day moving average of the Bitcoin price appearing in yellow.
This signal is usually seen as a decisive downturn in a market. With this death cross, you have to ask yourself if this is the time to panic about Bitcoin. After all, the whole market is giving in to extreme fear. What if you were wrong to remain optimistic and see this as an opportunity?
In the history of Bitcoin, we have already had 8 death crosses. On four of those occasions, the price of Bitcoin fell in the months that followed. On the other four times, the price of Bitcoin rose in the months that followed. So as you can see, a death cross is not always a sign of a coming Bear Market, just as a Golden Cross is not always a sign of a Bull Market.
Things are more complex than that, and it depends on many other parameters. The last Death Cross took place in the early summer of 2021. It scared a lot of investors, but Bitcoin held on to the $30K mark, before recovering in August 2021 to give us a Golden Cross, and finally a new ATH a few months later:
We'll see what this Death Cross will do to the price of Bitcoin this time, but from my perspective, panic is out of the question. You have no interest in selling your Bitcoin today if you understand the why of Bitcoin. The best you can do is to accumulate more if you have the cash to seize this opportunity.
If not, simply HODL Bitcoin without losing patience.
The key for Bitcoin in the short term is to hold the $40K support
In terms of supports to watch for, $40K is the major support that keeps us in the current Bullish scenario. If the $40K doesn't hold, we'll have to look at the $38K:
The last major support is the $30K level which has held up twice in 2021, and which keeps us in the current Bull Market. As you can see, there is still a long way to go before Bitcoin plunges into a Bear Market that everyone is dreading.
That's a scenario I don't envision at this time. I believe things will start to go up again by the end of January 2022. We will see if that happens. As always, this is just my opinion here. Please feel free to share your opinions on the current situation.
Stay strong, Stay Bitcoin HODLers.
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