BTC- Sentiment is still too bullish, we’re going below $6K and here’s how to spot THE bottom

Jon P Horvath
Jun 26, 2018 · 9 min read

Sentiment has shifted and become more bearish as we put in lower lows but still has a long way to go before we can find the bottom. The problem with BTC (and all crypto) is that they are instruments with zero valuation support — so once we solidly break $6K there are some weak technical support levels from 2017 ($2,800 and $4,300) but expect to see very large and violent downdrafts. We don’t rule out another rally to the $7,500–8,000 in the near term which will merely prolong the bottoming process.

In our last piece we noted the increase in the short interest vs daily trading volume and how this was likely to lead to a big short squeeze. We did see several short squeezes driving $200 — $500 upward moves in price that faded very quickly, and the SI is now back down to 25K range, reducing probability of a larger squeeze.

We’re not going to give you a specific time or price point estimate for the bottom because BTC will tell you when we are there- you just have to know what to look for. Finding the bottom will be a function of time and sentiment. There is no rush to try and catch a falling knife as there is plenty of time — first we need to see sentiment go from mildly bearish to “fear and loathing” accompanied by violent panic selling followed by disgust. This will be followed by a long period of consolidation with low volume that could last months. Finally, we will see a slow and steady upturn marked by steadily increasing volume and a new bull market will emerge.

Added a 9/25/18 update paragraph at bottom.

Sentiment has gotten more bearish, however, we are far from the “fear and loathing” that we need to see before we put in a bottom. In our update from 5/26 we talked about how “fear and loathing” or extremely negative sentiment being a pre-requisite for putting in a bottom. This is very important because what has been killing every rally is weak hands holding Bitcoin who believe that any moment we will be back on the way towards $20K (or the moon). Of course, these new BTC owners panic, and sell at the slightest hint that BTC is going below their purchase price or some other level.

Every time $BTC pops $200–300 in a short squeeze, all the technical guys get bullish, until the floor drops out again. We are not expecting a sharp V shaped bottom and we think at this point most have acknowledged, we are in a bear market (capitulation). This is progress, however, most are still optimistic that ~$6K range is THE bottom, and that we will soon rebound. When we first started throwing out our target $3–6K for a bottom back in our 4/1 update, we got very hard push back that we weren’t going below $6K. Now, finally, we’re seeing some targets in the $5K range and some even below. I pasted in a couple of sentiment surveys I came across on Twitter, and as you can see the sentiment reflected in these surveys is nowhere near the “fear and loathing” that we’re looking for in a bottom.

Bitfinex BTC outstanding short contracts between 6/20–25 in yellow and orange bars

As you can see in above chart, the short interest on Bitfinex had been increasing rapidly to above 30K just a couple of days ago, but is now back down to 25K, decreasing the chance of a large short squeeze. Our last note from 6/10 we spent some time discussing short interest as a good indicator of how investors are positioned and investor sentiment. Because of the relatively high short interest vs daily trading volume, we talked about the next move likely being up from a short squeeze. Since then, we did get 5 squeezes in the $200–500 range, but none of them had any follow through, and the drops have been $600–1000 range- which, of course, is very bearish action. We also want to note, that covering the almost 6K contracts over the last two days did very little to boost the price of Bitcoin, which tells us the selling pressure is high (see above chart).

Volume by Price histogram (left) on top of BTC price chart July to Nov 2017

At what price will BTC bottom ? At this point, our best guess is somewhere between $2800 and $4300, but we don’t have much support below $6K and fundamental news flow can, of course, modify the price action. We do see minor support levels at $5700, $4300, and $2800 from 2017 (see chart above). We identified these support levels by looking at a Price-By-Volume chart, which shows the amount of volume traded at each price level in the chart’s range in a histogram on the left hand side. Support and resistance levels come from where a stock has traded. If someone bought BTC on the way up at $6K and it hits $7K, but goes back down to $6K (this is called a “round trip”), they are likely to sell there. This is because people hate losing money. When stocks trade a lot of volume around particular levels — whether they are drawn to round numbers like $10K or some type of moving average — these levels become support from above and resistance from below. It’s important to note, that with BTC presently there is much more resistance levels above us than support below us. This is because we are now below all the longer term moving averages which will act as resistance. The 50, 100, and 200 day moving averages are the thin yellow, orange, and red lines between $7400 & $8300 on the right in the chart below.

BTC 1 Day Price Chart — Red, yellow, and orange lines are the 50, 100, and 200 day Exponential Moving Averages that will become resistance on way up

In terms of news flow, it has been mixed with another hack in South Korea on June 20th. Many were attributing the big drop that BTC took 6/21 to this hack, however, I’m skeptical. I think BTC investors are becoming immune to smaller hacks like this ($31M stolen), plus the timing of the hack doesn’t match up exactly with the BTC selloff. A good analogy for this came from Litecoin founder, Charlie Lee, who likened an exchange hack to a bank robbery- asking if a bank was robbed of $40M USD would lead people lose faith in the US dollar ? Of course not. In terms of what could be a strong positive catalyst, aside from a thaw in the regulatory environment in Asia, we think a BTC ETF being approved would be very positive catalyst significant as an ETF would buy actual Bitcoins. We think a BTC ETF would attract hundreds of millions of dollars quite quickly, which would provide a material boost to BTC price and become a self reinforcing cycle. A BTC ETF would remove a lot of hurdles and concerns folks have sending money to fledgling exchanges that are not SIPC or FDIC insured and even enable folks to tax shelter Bitcoin in a retirement account. An ETF based on the underlying BTC would have a much larger impact on BTC price than one based on a futures contract, which is essentially a side bet, or an exchange like Bitmex which is also derivative side bet.

We hear “BTC can’t possibly go below the mining cost?” and then a figure for mining cost like $5K or $6K is thrown out. Let’s break this into two parts to explain why it makes no sense. First, there is not one cost to mine Bitcoin — each Bitcoin miner has an average cost however this varies widely based on their input costs- mainly their cost of electricity which varies significantly by region but also equipment/depreciation, cooling and labor. In addition, the difficulty of the hash keeps increasing and this drives up the cost. Most BTC miners are in China, which has a relatively low cost. However, even when BTC goes below a miner’s fully loaded cost they won’t stop mining. They will be looking at their marginal cost. As long as they are covering their variable costs such as electricity, cooling and maintenance they will continue to mine. In addition, well capitalized miners may even mine at a loss for some time to put other miners out of business.

When the price of gold gets down to the cost of production, does that provide support for the price? Of course not. At least in the short to medium term and that is all we care about. Speculators and investors don’t really care if gold or Bitcoin is below the cost of production. However, in the longer term if price is below cost gold mining capacity will go off line (starting with the least efficient/highest cost) and eventually this lack of supply will cause scarcity and a rebound in the price. With BTC we see similar dynamics but the concern is if prices go so low that fewer miners are incentivized to mine and blocks stop being validated. There is a built-in mechanism to deal with this problem and smooth the output of Bitcoins given to miners as rewards. This mechanism is the difficulty level of solving the hash which should come down lowering the cost of mining so it is again lucrative for miners to validate blocks. Capital intensive industries like semiconductors do have downside support at their book value. This is because the capital equipment and working capital that they own enables them to produce a product and sell it at profit. Bitcoin has no such dynamic.

In summary, finding the bottom is a function of sentiment and time and we don’t think the bottom will be V-shaped without some game changing fundamental news. Here are the signs to look for, pay particular attention to volume levels:

  1. Sentiment needs to get much more bearish (“fear and loathing”) along with violent panic selling as we near bottom.
  2. This is followed by a period (could be months) of boring and steady consolidation at low volume with a few frustrating head fake rallies that will cause most investors to lose interest.
  3. Finally, when no one is paying attention, volume will sneakily pick up as price starts slowly and steadily increasing and the next bull market will be born.

At the time of this writing BTC was banging around in the $6,200 – $6,300 range.

9/25/2018 Update This is playing out as expected and on the margin we think what has changed is that sentiment has gotten more bearish. We are still in the capitulation phase but we haven’t gotten to the violent panic selling that will mark the bottom. We say sentiment is more bearish for two reasons, first we have seen a down tick in sentiment in Twitter surveys (and just the level in crypto twitter activity in general) where now more than half respondents are bearish in general (see survey on left and compare vs the ones in paragraphs above). Second, at the time of the writing of this piece (late June) the Bitfinex SI was in the 25K range (see below chart — blue and brown bars are SI). You can see that SI has trended higher since then and is hovering near the all time highs of 40K- which of course is an indication that sentiment is more bearish. So we are making progress towards a bottom however sentiment needs to get much worse. Every time a coin rallies it seems there is still a group of folks, like more recently Mike Novogratz, that decides to call THE bottom and it ends badly. On the volume front, we are still banging along the bottom with a small volume increase each rally that eventually fades. So the take away is that progress is being made towards putting in a bottom but likely still many months out unless we see a “game changer” in the fundamentals.

BTC 1D chart with Bitfinex short interest (blue and brown bars)


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Jon P Horvath

Written by

Former Wall Street analyst (Lehman Bros, Neuberger Berman, Sigma) living in the Bay Area with his wife and daughter. Enjoys trading crypto and writing about it.



Coinmonks is a technology-focused publication embracing decentralize technologies. We are Non-profit and education is our core value. Learn, Build and thrive. Our other project—,,