Crypto Technicals: Has Bitcoin Hit A Bottom?

There may be some gyrations around the lows on more bad news but any further dip will be devoid of the venom seen over the year.

<div class="paragraphs"><p>(Source: Unsplash)</p></div>
(Source: Unsplash)

Every asset class, in its movements, sooner or later hits a top or a bottom. Those are the best points for entering a new trade. Let’s examine the background and current situation to see whether we can make such a judgment at this juncture.

The news surrounding cryptocurrencies right now looks to be the worst. Coins are fading, exchanges are going bust, high-flying icons of the crypto world are hitting bankruptcies, etc. The news probably couldn’t get any worse. No surprise therefore to find most crypto charts are hitting the skids and prices are at multi-month lows. The air is thick with scams and Ponzi schemes leading to excessive volatility. There is high uncertainty about which market makers or crypto firms are still solvent—and will remain so—and it is definitely translating into a lack of demand for cryptos and that is reflected in prices hitting the skids. 

This volatility is also compounded by continued lack of clarity—or indeed, conflicts—with regard to regulations across different countries in the world. Without a working framework for crypto sector regulation, different countries and states have a plethora of conflicting policies on how cryptocurrencies are classified as assets and precisely what constitutes a legal payment system. This weighs on growth and innovation within the sector, and many analysts believe that the mainstreaming of cryptocurrencies cannot happen until a more universally agreed upon and understood set of laws is enacted.

Scams and Ponzi schemes continue to prevail and make headlines every week. FTX and Almada are the more recent ones and earlier, the implosion of Three Arrows Capital and fund crunch at Genesis Trading, owing to exposure to FTX, has been impacting the largest of them all—Bitcoin. If DCG, the parent of Genesis Trading, were to slide into trouble, there could be more woes for Bitcoin. 

FTX Crypto Bubble Really Is the Worst of Its Kind

Having looked at the background of cryptos currently, let's turn to the technical side for some clues. Typically, charts will show divergences at market extremes and the so-far 77% decline in Bitcoin values can certainly be thought of as a market extreme.

Patterns on charts tend to appear at market sentiment extremes. The high in BTC at 68,000 was a sentiment extreme and currently, the lows near 16,000 are similarly so.

On Chart 1, I have shown a external Fibonacci ratio relationship of 61.8% (golden ratio) level for the rise as well as for the fall. This is the first indication that the current prices may be near a completion of the down move. Next, continuing with Fibonacci—but not shown on this chart—is that the current levels are at 78.6% internal retracement level, once again indicating a looming support.

Crypto Technicals: Has Bitcoin Hit A Bottom?

Next, in chart 2, we step down to the weekly time frame to check whether there is any dissipation in momentum of the decline. Given the way the decline is progressing, such a signal will not be available on the monthly chart as of now. Looking at the chart, we can clearly spot divergence at the lows near the oversold zone of the RSI. 

Crypto Technicals: Has Bitcoin Hit A Bottom?

We then proceed to the daily chart time frame to check whether we could be at some point of trend reversal. It is not sufficient that prices reach a support zone or show dissipation of momentum at the lower levels—there should also be signals of reversal from those formations.

Chart 3 shows the daily chart of BTC with a Regression channel. The slam down of Nov. 9 to create the low has not seen a follow through (yet) and possibly was a climactic fall with huge volume surge.

Now, the prices are seen edging their way higher towards the regression line. The first sign of strength would be for prices to cross and hold above the regression line (at 16,900 levels) and then to progress to break out of the channel—which would require a move past 19,000 levels ahead.

Crypto Technicals: Has Bitcoin Hit A Bottom?

So, the near term is one of wait and watch where we have to check for such signals to emerge.

The more aggressive traders could take a position in anticipation of such events happening, but realise that one is taking a risk. Others can wait for confirmation of strength returning and then participate. 

I have saved the best for the last. The image below—Chart 4—is the cover page of the latest edition of The Economist.

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It is a well-recorded fact that when magazine covers feature big market moves up or down, it is usually a market extreme. The very fact that crypto fall has made it to the cover page of one of the most preeminent magazines would imply yet again that crypto prices are probably hitting the bottom! 

Collectively, the situation in Bitcoin, and by extension, most other crypto currencies, should be hitting their bottoms now at least for the intermediate term. Perhaps, there may be some gyrations around the lows on more bad news but I would expect that any further dip will be devoid of the venom seen over the year.

The technical set-up has been shown in detail and conditions for entering into a trade have been defined as well. A point to take some risks of bottom fishing is at hand right now. 

CK Narayan is an expert in technical analysis; founder of Growth Avenues, Chartadvise, and NeoTrader; and chief investment officer of Plus Delta Portfolios.

The views expressed here are those of the author, and do not necessarily represent the views of BQ Prime or its editorial team.