Bear markets have historically been a challenge for traders and the conventional set of “reliable” indicators that determine good entry points are unable to predict how long a crypto winter may last.
Bitcoin’s (BTC) recent rally above the psychologically important $20,000 price level was a sign to many traders that a bottom had been reached, but a deeper dive into the data suggests that the short-term relief rally could not be sufficient proof of a change in trend at the macro level.
Evidence pointing to the need for caution was provided in a recent report from cryptocurrency research firm Delphi Digital, which suggested that “we need to see a bit more pain before we have any conviction that the market has bottomed out.” “.
Despite the pain that has already been felt since Bitcoin price peaked in November, a comparison between its pullback since then and the 2017 market high points to the possibility of further decline in the near term.
During previous bear markets, the price of BTC fell roughly 85% from its high to the eventual low. According to Delphi Digital, if history were to repeat itself in the current environment it would translate to “a low just above $10,000 and another 50% decline to current levels.”
The outlook for Ether (ETH) is even more dire as in the previous bear market its price fell 95% from high to low. Should the same scenario play out this time around, the price of Ether could drop to as low as $300.
DelphiDigital said:
“The risk of reliving a similar drop is higher than most people are probably discounting, especially if BTC fails to hold support in the $4,000-16,000 range.”
Oversold conditions prevail
For traders looking for where the bottom is in the current market, the data shows that “previous major market bottoms coincided with extreme oversold conditions.”
As shown on the weekly chart below, BTC’s 14-week RSI recently dipped below 30 for the third time in its history, with the previous two occurrences occurring near a market bottom.
While some may take this as a sign that now is a good time to re-enter the market, Delphi Digital offered a word of caution for those expecting a “V-shaped” recovery, noting that “In the two In previous cases, BTC traded in a choppy sideways range for several months before finally staging a strong rally.”
A view of the 200-week simple moving average (SMA) also raises the question of whether the historical support level will hold again.
Bitcoin recently broke below its 200-week SMA for the first time since March 2020. Historically speaking, the price of BTC has only traded below this level for a few weeks during previous bear markets, which points to the possibility that a fund will soon be found.
The final capitulation
What the market is really looking for right now is the final capitulation that has historically marked the end of a bear market and the beginning of the next cycle.
Although sentiment in the market is now at its lowest point since the Covid crash of March 2020, it has not reached the depths of despair seen in 2018.
According to Delphi Digital:
“We may need to see a little more pain before the sentiment really bottoms out.”
The weakness of the cryptocurrency market has been evident since the end of 2021, but the real driving force behind the market meltdown includes runaway inflation and rising interest rates.
Rising interest rates are usually followed by market corrections, and with the Federal Reserve intending to stay on course to raise rates, Bitcoin and other risk assets are likely to continue to correct.
One final metric that may suggest a final capitulation event is due is the percentage of BTC supply in profit, which hit a low of 40% during previous bear markets.
This metric currently sits at 54.9% according to data from Glassnode, adding credence to the view that the market could still experience another leg down before the true bottom occurs.
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