History says that Bitcoin has bottomed out and will rally. This time may be different.

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Bitcoin has become increasingly correlated to stocks over the past year. Ozan Kose/AFP via Getty Images

Historical trends suggest that Bitcoin may have bottomed out after a year-long bear market and is on the verge of a rally. But the correlation between cryptocurrencies and the stock market means that may not matter and cryptos could be vulnerable to more losses.

While the biggest crypto has soared 40% since the start of 2023, that belies Bitcoin’s bad run: down two-thirds from its late-2021 high as the total market capitalization of digital assets fell to 1 .1 trillion versus nearly $3 trillion.

But things have been looking up recently, with Bitcoin recovering from a two-year low around $15,500 in November and rising steadily ever since. Data from previous bear markets and subsequent bullish turns would indicate that the worst of the crypto winter that chilled markets for months is ending.

In the majority of cases where Bitcoin has rallied for eight or more days, it continues to make significant gains over subsequent three-, six-, and 12-month periods, analysts at crypto exchange Bitfinex noted in a report. Monday report.

More telling is what happened in the few instances where Bitcoin was down three, six, or 12 months after such a long winning streak. After an eight-day rally at the end of 2017, Bitcoin posted three-, six-, and 12-month losses. This happened again at the same intervals after the next eight-day rally, which took place in 2019. But the following eight-day rally then marked spectacular gains.

Typically, after two such rallies, back to back, the next one provided the highest reward percentage in the history of the assets, Bitfinex analysts said.

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The market is approaching a point where the next such case could occur.

A 10-day rally at the end of 2021 has since seen negative returns over the following three, six and 12 months, and the next eight-day rally after that was in March 2022, after which Bitcoin was negative at the end. three and six months. . Historical trends suggest that Bitcoin will be negative year-over-year by the end of March, which would only require a price level below $40,000, which is a long way off.

A price target for Bitcoin above $40,000 in less than two months seems unrealistic. This would suggest that the biggest crypto is on track to solidify another three-, six-, and 12-month downside case after two consecutive eight-day or longer rallies.

Which means that the next fairly long rally that already took place a few days ago should usher in dramatic gains, if history repeats itself.

However, we are not yet out of dangerous waters, Bitfinex analysts said. There is a damning argument to undermine these seductive historical arguments.

Bitcoin and other cryptos have become firmly tied to the stock market over the past year, bucking their independent performance trend as high inflation and rising interest rates have dampened demand for all risk-sensitive assets. This correlation remains strong, which means that the Dow Jones Industrial Average and the S&P 500 are the most likely factors driving Bitcoin. And the macro outlook for stocks like Bitcoin looks a bit bearish at the moment.

Since the asset class is currently highly correlated to the US stock market, bearish macro developments may prevent the asset from repeating past performance, Bitfinex analysts said.

that pretty much sums it up. While the historical facts sound enticing, investors may want to heed them and not get caught up in what could be another fake for a battered asset that increasingly seems to be at the mercy of stronger sentiment. wide.

Barrons made an argument for investors to sell the current rally in equities as the market appears to be trying to fight off the Federal Reserve, which could shock traders this week by telegraphing that the end of high interest rates is still a long way off.

Crypto traders may want to do the same.

Write to Jack Denton at [email protected]

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