Is the bottom in for Bitcoin? Probably not but we’re finally getting close!
We haven’t done a proper BTC price update piece for some time, but we think we are near the end of the tunnel. We’ve been waiting for two things to happen — an uptick in volume and a capitulation selling downdraft. We saw BTC volume finally upticking (after many head fake upticks) and we started working on this piece and then came the big drop from $6300 to $5200. The current downdraft is probably not over but we think we are finally seeing these two elements of the bear market bottoming process that we have been waiting for.
We have been bearish and calling for BTC to retest the $6K level since March. In June we published this piece on how to spot the bottom of the Bitcoin bear market. Our approach is to give you the tools to spot the bottom by noting the elements that we have observed living through the 2000 tech bubble and 2008 credit bubble while working on Wall Street. The caveat is that not all bear markets, and specifically the timing of these elements within bear markets, are the same and of course, fundamentals can change.
Time: A bear market needs time to work through the accumulated excess- all the weak hands that jumped in late due to FOMO need to sell their positions. In trying to gauge what inning we are in the current bear market, we think it’s useful to compare the current bear market to the 2014 bear market. In the 2018 bear market BTC broke it’s bear market downtrend line after 10 months (on Oct 15) compared to 17 months in the 2014 downturn (see below chart). September of 2015 is when BTC shook off the bear and re-started it’s upwards trajectory, which implies that we have about 3 months left in the current bear market. Note the candlesticks that mark the rebirth of the bull market in Sept and October of 2015. These are textbook bullish candles — large green candles with small wicks, increasing in size on increasing volume. This is what we would like to see ultimately but we also note that in June of 2015 we saw similar candles and it turned out to be a head fake.
As described in our “How to spot THE Bottom” piece, here are the elements we feel need to be present before BTC can find a bottom:
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.
We will go through each of the above elements with our updated thoughts:
Sentiment: Has turned much more bearish, there is apathy and we think a lot of folks have lost interest in crypto. We attend many crypto conferences and meetups in the Bay Area and both, attendance and the number of events, are way down. Crypto Twitter is very quiet and folks have accepted it’s a bear market in the last few months. In terms of capitulation, we have seen folks taking down their $25K — 100K year end 2018 price targets and we are also seeing less crypto coverage on CNBC.
Volume: We have seen months of very boring/steady consolidation at low volumes with some small head fake rallies. In fact, in the 2nd half Oct BTC volatility got so low that the BTC chart was starting to look like the USD Tether chart! Now we are seeing an uptick in volume and it seems to be breaking out of the volume range it has been mired in since May. In the below volume chart the orange line is 5 day rolling avg volume while we’ve added the yellow line to show we are now above the top of this range. We look at aggregate exchange volume because there has been very large share shifts between exchanges ie Binance and Bitmex gaining large market share.
Final Panic Sell Downdraft: We believe we are finally seeing the capitulation “panic downdraft” sell. Of course this doesn’t mean there won’t be more downturns in the future and the current panic downdraft is likely not over. The way we think about it is, and we know it’s counter intuitive, the more violent and larger this panic sell is, and the higher the volume is, the more confidence we have this is the bottom.
Price Action: The lack of volatility and consolidation marked by doji (small tight) candlesticks that we have been seeing 2H Oct (chart on left) along with the “sneaky” volume pickup are exactly what we’ve been waiting for. Technical guys are saying that there is no support below $6K and we’re going much lower but they say that every time we go below $6K.
What can we expect from here: Once the panic sell downdraft has subsided we expect continued slow and steady volume increase along with lower volatility. We are not saying that the volume won’t fluctuate up and down a little, but what would be concerning to us is if the 5 day rolling avg aggregate BTC exchange volume dropped back down towards the low end of the range we just broke out of.
While we are on record saying we don’t expect the BTC bear market recovery to be V shaped, we do think that the final panic sell downdraft can be V- shaped as it was in 2014. And, it’s only prudent to expect some head fake rallies before the bull market is reborn.
Risks: Of course there is always risks of large head fake rallies or a double bottom. Really the volume, specifically, a steady increase in volume, is the key indicator to keep an eye on from here, that can give us some assurance that the bottom is in.
Bringing up the 2014 comparison again- in 2014 the peak to trough decline was 85% range while in the current bear market we’re closer to 75% peak to trough decline. We are not looking for the exact same decline but use this more as a sanity check. So if we do apply the 85% peak to trough decline decline to 2018 we get BTC bottoming in the $3K range, significant downside from here.
The other risk for BTC is the fundamentals, which we believe are not improving. It’s especially hard finding a bottom for an financial instrument with no cash flows (BTC actually consumes cash for mining rewards).
· BTC use for payments continues to decrease, in our last piece, How HODLing Has Killed Bitcoin as a Digital Peer-to-Peer Electronic Cash System, we argued that the killer app for Bitcoin is greater fool trading or speculation. This is fine, however, if this is the primary use case then the exchanges need to clean up their act which leads us to the next point.
· Crypto exchange fraud and manipulation continues to be rampant and are not showing any signs of improvement. This will drive new money away and has the potential to kill Bitcoin. And, new BTC derivative or future exchanges are a negative in our opinion. This is because they further fragment the market adding liquidity pools which can’t be arbitraged which is what manipulators and HFTs want to see.
· ICO funding has stalled — while folks view this negatively, we think this is a plus, because there is less crypto currencies coming to market, which means “crowding out” of investment dollars that would have gone into Bitcoin
· We think the regulatory environment is improving, but we still have a huge overhang from the 200+ SEC and some criminal investigations that are ongoing. These ongoing investigations promise a rich supply of negative news flow, however, the negative news doesn’t seem to have that much impact on price, which is another indicator that we are near a bottom.