While the long-term outlook for Bitcoin remains extremely optimistic, several indicators are suggesting a high risk of a sharp sell-off in the coming weeks.
Quick take:
• Bitcoin is shaping up to have a higher risk of a sharp sell-off in the near-term as it trades beneath its 200 DMA and OBV trends downward
• The longer-term outlook for Bitcoin remains extremely optimistic as there is evidence of both smart money investing in the asset and macroeconomic conditions exacerbating
Volatility has certainly been reignited in the Bitcoin market with two significant price movements taking place last week. Last week wrapped up with a significant move to the upside for bitcoin but price may be returning to a vulnerable position with substantial downside risk as our technical analysis will highlight.
Bitcoin Technical Analysis Developments
Bitcoin’s phenomenal 42% price increase from three weeks ago failed to close above the 38.2% Fibonacci retracement level between the December 2018 low and the June 2019 high. The price had sincerepeatedly tested the 200-daily simple moving average (200 DMA) as an area of support but sharply broke below on Friday 8th of November.
The 200 DMA is a metric which is widely monitored to gauge the long-term trend direction and the return of price below the 200 DMA may signal significant downside risk for bitcoin price. The high of the bitcoin price increase on the 11th of November closely corresponded with the 200 DMA highlighting the importance of this moving average.
But a more concerning development is the downward trending on-balance volume (OBV) indicator. OBV tracks the cumulative effect of volume by subtracting volume when candles record a loss and adding volume when candles record an increase. OBV has been trending downward since the 27th of October whichsuggests buyer liquidity is being absorbed by selling pressure.
Such a phenomenon has preceded the previous two sharp sell-offs. OBV trending downward from the 3rd of September to the 22nd of September preceded a 22% price drop.
From the 2nd of October to the 19th of October, OBV was also trending downwards. This was followed up by OBV breaking its downward trend on the 20th as the price increased roughly 3%.
However, the price increase found strong selling pressure with an 11% drop taking place over the following three days. Whether this phenomenon will repeat itself on this occasion is uncertain but Bitcoin does appear to be in a position where it is vulnerable to a sharp sell-off.
Altcoin Season Update – Analyst Splits Altcoins Into Two Types
Earlier this year, we assessed the prospects of an altcoin season taking place whereby altcoins outperformed Bitcoin for a prolonged period of time. We concluded by assigning “low odds to the scenario of altcoins entering a period of outperformance which lasts longer than a few days”.
To date, this assessment has been accurate. Altcoins have failed to demonstrate any sustained outperformance of Bitcoin.
During the week, on-chain analyst Willy Woo split altcoins into two types of classifications. What he labels “Degens” comprise the vast majority of the altcoin market. When plotted on a log chart in terms of their bitcoin value, Degen altcoins are characterized by a clear downward trend.
Willy Woo identifies the other classification as oscillators. When plotted on a log chart of their bitcoin value, altcoin oscillators fluctuate above and below an arbitrary horizontal line for at least one full market cycle (roughly four years).
These altcoins have proven to be effective stores-of-value to date. Timing the oscillations of this class of altcoins is noted by Willy as an acceptable strategy to accumulate more bitcoin.
Litecoin, stellar lumens, and doge are all identified as oscillator altcoins. Decred is also identified as an interesting case to monitor as it approaches its first full market cycle.
Macro Outlook - Bitcoin Investment Thesis
Despite the downside risk highlighted in our technical analysis, we continue to hold extremely optimistic outlooks for the long-term price performance of Bitcoin and its ability to return to all-time highs and move even further to the upside. A number of factors are strengthening this macro outlook for Bitcoin.
In the Altcoin Season article, we identified economic turbulence playing out in the macro environment as strengthening the investment thesis for Bitcoin.During the week, one of the most successful macro fund managers Ray Dalio published a post detailing how the global economy is becoming more unstable.
Such concerning economic developments likely strengthen the long-term investment thesis for Bitcoin as the asset is commonly considered a strong store of value and a hedge against macro uncertainty. In any case, the downside for Bitcoin in the event of an economic crisis would likely be limitedwhich has been previously explored in a study by research firm Adaptive Analysis.
In last week’s Bitcoin analysis, we highlighted evidence that indicated institutional accumulation of bitcoin. Such an event would further strengthen the optimistic outlook for Bitcoin as it would suggest the smart money is gaining exposure to bitcoin.
Smart money and institutions accumulating far precede significant upward price movements in the typical evolution of markets as illustrated in the widely cited chart above. The metric used to gauge the institutional accumulation of bitcoin was the number of addresses holding greater than 1,000 bitcoin with asharp spike being observed in the second half of September.
Bitcoin Price Performance Summary -
Price developments over the past week once again lead our analysis to believe that bitcoin has a lot of downside price risk in the coming weeks. The 200-DMA lying above Bitcoin price and the downward trending OBV are our chief concerns regarding short-term price performance.
For the long-term Bitcoin price performance, our outlook is as optimistic as ever and is strengthened by developments over the past two weeks. An increase in the number of addresses holding 1,000 bitcoin and concerning economic developments both strengthen our outlook that Bitcoin can eventually return to all-time highs and continue increasing far beyond.