Did Bitcoin and the Cryptocurrency Markets Hit the Bottom Last Week?
In the past couple of days, I have been noticing quite a few crypto influencers’ questioning the bottom of the crypto markets’ current market cycle. Did we reach the bottom yet? While none of us have a crystal ball, there are a few clues that indicate that we reached the bottom of the current market cycle during the last week. Let’s take a look…
Failing to Break Support on Bitcoin (BTC)
We have seen the market test Bitcoin’s $5,800 — $6,000 price level, a couple of times, during the past several months. Every time Bitcoin reaches this support level, prices would bounce up to higher levels with relatively heavy volume. This price resilience shows that there are still people and institutions who believe in the technology. If we look at historical BTC prices, we can see that within each bubble, prices would crash from all-time-highs, but would maintain a much higher support level after the bubble was fully deflated. The current market cycle seems to maintain a support level at $5,800, which is about 500% higher than its previous support level. This 5X multiple (from prior to current) price support is similar (at about 4X — 6X) to previous market cycles.
Ignoring the Bad News
The SEC’s rejection on nine different Crypto ETF applications did not affect the markets as negatively as most would expect. In fact, market participants just shrugged the news off and markets actually elevated slightly higher after the news came out. This is a sign that the bears are fatiguing and running out of ammunition to attack. Remember there’s only so much crypto they can sell until the market flattens. Eventually, the only market participants left in the market are the Long Term Hodlers and the crypto bulls. Seems like all the bears have exhausted everything they have and don’t have much left in the tank. Chances are that we will see sideways movement for quite a while until the next bull-run.
Additionally, on August 23rd, headlines across numerous websites and publications started to show further tightening of Chinese regulations against cryptocurrency. The markets shrugged this off, as if everybody already knew about this, and continued to slightly trend up. In the past, any negative Chinese-related news would cause gigantic sell-offs in the crypto markets, but not this time.
Shaking Off the Shorts
On August 24th, one of crypto’s largest trading exchanges (Bitmex) went through maintenance, where the operators shut trading down for a couple of hours. During this time frame, traders at Bitfinex bid up the price of Bitcoin, squeezing shorts on Bitmex when the platform reopened for trading. While Bitfinex traders were rapidly pumping up BTC prices, many traders in other exchanges, such as Coinbase Pro, were arbitraging the price differentials between Bitfinex’s BTC prices vs. other exchanges’ BTC prices. This process created huge volume and might have been the reason why prices reached about $8,000 abruptly across all trading platforms.
Before the price spike, BTC was originally trading at about $6,500, meaning there’s a possibility that shorts were holding BTC prices down by 23%. This goes to show how much influence the shorts have in cryptocurrency market prices. Eventually, we will shake off all the short sellers. The Bitmex incident most likely instilled fear into some of the short sellers. They probably realized that anything can happen and that nothing is a sure thing. Even if BTC is fundamentally overvalued, the markets can do something unexpected and wipe out their accounts in a blink of an eye. Perhaps, we may have more of these occurrences in the future, which will shake off more shorts in the market.
The Market Never Does What’s Anticipated
There are many people in the crypto community, included myself, who still believe there’s one or two more capitulation stages before we see the end of the bear market. We still believe Bitcoin can reach $3,000 — $4,000, and the cryptocurrency market capitalization can reach $150 — $160 Billion. In fact, I know quite a few people who are still sitting on short positions, waiting until we reach those levels, before jumping back long into the market. The fact that the market knows that there are people who think this, is reason to believe that we probably will not reach those levels. Remember that markets are created to make the few rich, while the masses lose money. Most markets will do the opposite of what’s expected (at least in the short term) to funnel poor/dumb money into rich and smart money. So, the fact that there are still a lot of people out there who anticipate the market will go lower is reason to believe that the market will not do so. We can surmise that trading bots and crypto whales will hold certain price levels to prevent further substantial price declines.
Not Out of the Woods Yet
Having said all of the above, we are probably still not out of the woods yet. Unexpected stricter regulations from the US could cause further price declines. Poorly ran projects and inadequately funded cryptos will die, causing the overall market cap to fall. Even though unforeseen negative events can cause further capitulation, those events would have to be a lot more meaningful and substantial to the fundamental standing of crypto. In other words, any negative news coming out related to cryptocurrency, must in fact be significant real (not fake) news.
*CNBC will broadcast a special documentary on cryptocurrencies, 6PM Eastern Standard Time, this evening, called: Bitcoin: Boom or Bust. I look forward to watching what mainstream media has to say about this emerging new technology. The documentary would probably talk about the history, opportunities, and problems associated with the current state in crypto. This should be interesting to anybody who is new to the space.
Originally published at Henry Kwong, CPA.