Historically, bear markets have been difficult for traders to navigate and the conventional set of “reliable” indicators that determine good entry points cannot predict how long a crypto winter might last.
Bitcoin’s (BTC) recent rally above the psychologically important $20,000 price level was a sign to many traders that it had bottomed out, but a deeper dive into the data suggests the short-term relief rally may not. be proof enough of a macro level trend reversal.
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 are convinced the market is bottoming 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 a further short-term decline.
During previous bear markets, the price of BTC fell by about 85% from its highest point to its lowest point. 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% drawdown to current levels.”
The outlook for Ether (ETH) is even bleaker as the previous bear market saw its price drop by 95% from peak to trough. If that same scenario plays out this time, the price of Ether could drop as low as $300.
“The risk of reliving a similar crash is higher than most people are probably discounting, especially if BTC fails to hold support in the $14K-16K 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 approaching market bottoms.
While some may take this as a sign that now is a good time to re-enter the market, Delphi Digital offered a warning to those expecting a “V-shaped” recovery, noting that “In the above two cases , BTC traded in a choppy sideways range for several months before finally staging a strong recovery.”
A view of the 200-week simple moving average (SMA) also raises questions as to 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 bottom may soon be found. .
Related: Bitcoin Price Drops Below $21K as Exchanges See Record Outtrend
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.
While sentiment in the market is now at its lowest point since the COVID-19 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.”
Weakness in the crypto 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 tend to be followed by market corrections, and with the Fed intending to keep interest rates the course, Bitcoin and other risk-averse assets are likely to correct further. .
One final metric that suggests a final capitulation event must occur is the percentage of BTC supply in profit, which hit a low of 40% during previous bear markets.
This metric currently stands at 54.9%, according to data from Glassnode, adding credence to the view that the market could still experience another bear leg before bottoming out.
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