Bitcoin is up 50% since the new year, but here’s why new lows are likely yet to come

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Much to the delight of investors across the cryptosphere, the price of bitcoin (BTC) is up more than 53% since hitting lows of US$15,476 (12,519) in November. Now trading around US$23,000, there are many rumors that the bottom has finally been reached for the major cryptocurrency after a year of painful decline in November 2021, the price peaked at nearly $70,000 US.

If so, that’s not just good news for bitcoin but for the entire cryptocurrency market, as the others are largely moving in line with the leader. So, is crypto back in business?

Internet Lessons

The past is littered with various periods of market turbulence, from the global financial crisis of 2007-09 to the collapse of COVID-19 in 2020. But none of these periods is a particularly good comparison for our purposes because they both saw strong declines and recoveries, as opposed to bitcoin’s slow run. A better comparison would be the bursting of the dot-com bubble in 2000-02, which you can see in the chart below (the Nasdaq is the index that tracks all tech stocks).

Nasdaq 100 Index 1995-2005

Commercial view

Look at bitcoin’s chart since it peaked in November 2021 and the price action looks quite similar:

Bitcoin Bear Market Price Chart 2021-23

Commercial view

Both charts show that bear markets go through various periods where prices rise but do not reach the same level as the previous peak known as the lower highs. If bitcoin follows a similar trajectory to the Nasdaq in the early 2000s, it would make sense for the current price to be another lower high and followed by another lower low.

This is partly because, like the Nasdaq of the 2000s, bitcoin appears to follow a pattern known as the Elliott Wave. Named after the famous American stock analyst Ralph Nelson Elliott, he essentially argues that during a bear market, investors switch between different emotional states of disappointment and hope, before finally despairing and deciding that the market will never turn in their direction. favor. This is a final wave of sell-offs known as a sell-out.

You can see this idea on the chart below, where bitcoin is the green and red line and Z is the potential breakout point at around $13,000 (click the chart to enlarge). The black line is the path taken by the Nasdaq in the early 2000s. The blue pointing finger above this line is potentially the equivalent location to where the price of bitcoin is currently located.

Bitcoin now vs. Nasdaq in the early 2000s

Author provided

The only other thing to notice on the chart is the wavy line that moves horizontally along the bottom. This is the stochRSI or Stochastic Relative Strength Index, which indicates when the asset looks overbought (when the line reaches its maximum) or oversold (when it reaches its bottom).

A sign of an upcoming change is when the stochRSI moves in the opposite direction that the price is heading: so now the stochRSI is falling but the price has been holding around $23,000. It also suggests that a fall could be imminent.

The Wealth Transfer Game

Within markets, there is often a game that investors from institutions such as banks and hedge funds play with amateur (retail) investors. The goal is to transfer wealth from retail investors to these institutions.

It’s especially easy in an unregulated market like bitcoin because it’s easier for institutions to manipulate prices. They can also speak up (or down) in price to stir up the emotions of retail investors and get them to buy high and sell low. This traps irrational investors who buy at higher prices, transferring wealth by giving institutions the ability to convert their holdings into cash.

It therefore makes sense to compare the behavior of retail and institutional investors in recent times. The following graphs compare crypto wallet addresses that hold 1 BTC or more (primarily retail investors) with those holding more than 1,000 BTC (institutional investors). In all three charts, the black line is the price of bitcoin and the orange line is the number of wallets in that category.

Behavior of retail investors

glass knot

Behavior of institutional investors pt 1

This chart shows all wallets that hold at least 1,000 BTC. glass knot

Behavior of institutional investors pt 2

This chart shows all wallets that hold at least 10,000 BTC. glass knot

This shows that since the FTX scandal in November, which led to the world’s second largest crypto exchange meltdown, retail investors have been buying bitcoin aggressively, resulting in the most addresses holding at least one BTC. On the other hand, the largest institutional investors have offloaded. This suggests that institutional investors agree with our analysis.

where were we going

There are those who argue that bitcoin is a bubble and ultimately cryptocurrencies are worthless. That’s a separate debate for another day. If we assume there is a future for blockchains, which are the online ledgers that enable cryptocurrencies, the key question is when will bitcoin reach the accumulation phase that usually ends a bearish phase? in any market.

Known as the Wyckoff accumulation, this is where the price of the asset repeatedly tests two areas: the upper boundary where traders have previously sold enough for the price to stop rising (called resistance) , and the lower boundary where traders bought enough for the price to stop falling (called support).

The moment institutional investors decide that the lower boundary has proven to be sufficiently resilient, i.e. they believe the price is cheap at that level, they will start buying the asset again. That moment is only likely to come after a surrender.

Of course, history does not exactly repeat itself. This may be the first time that retail investors have outwitted big institutions, and the only way now is up.

More likely, however, there is more pain on the way. With a recession on the cards, unprecedented layoffs and weak retail data out of the US, this doesn’t indicate the kind of optimism that tends to drive markets higher. It would therefore make sense to brace for another drop in the price of bitcoin and the rest of the crypto market.

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