Letter #13: Bitcoin and the Death Cross

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May and June 2021 have been rather difficult for Bitcoin and the cryptocurrency market as a whole. After hitting a new all-time high in April, Bitcoin entered a correction phase after repeated bearish news on the topics of environmentalism, regulation, and security. Since the initial price drop, Bitcoin and its legion of investors have seemed uncertain on the next move for the market, and that uncertainty has been visible as Bitcoin’s price has oscillated between $30,000 and $40,000 for weeks.

In financial markets, it’s common for traders and investors to look for technical indicators that they hope will give them a clue as to where prices will go next. After all, it’s impossible to know whether an asset’s price will rise or fall on any given day, or foresee the bullish or bearish events that may drive those changes in price. While there are a variety of short-term and long-term indicators for any type of financial market, one that is most commonly referenced during periods of market indecisiveness is the death cross.

What is a death cross and is it as bad as it sounds?

The death cross is commonly used as an indicator for negative reversals during a bull market and appears when a short-term moving average crosses over a long-term moving average. A moving average is simply the average price over a specified period. So the 50-day moving average identifies the average price for the past 50 days, and the 200-day moving average identifies the average price for the past 200 days. When the short-term moving average crosses over the long-term moving average, investors frequently interpret it as a signal that short-term momentum in the asset is slowing.

What does the death cross mean for Bitcoin?

For most of the six-month period prior to May, Bitcoin was experiencing significant gains in its price. It seemed that a new all-time high was reached every week and, for many, it felt like the bull market would never end. In fact, Bitcoin’s price performance was so explosive that the 50-day moving average was nearly double the 200-day moving average for several weeks in March. Bitcoin’s positive performance meant that it has had quite a ways to fall before risking a death cross. However, lackluster performance for the past month has brought Bitcoin to the point of experiencing a death cross within the next few weeks unless a huge boost in the price is seen in the near term.

If Bitcoin does experience a death cross, does that signal the end of Bitcoin’s current bull market? Or can the uptrend be salvaged even in the face of the death cross? A look at Bitcoin’s past performance following death crosses shows us that it may not be the surefire bear market indicator that many analysts hope it will be:

As you can see from the chart above, the death crosses for Bitcoin in early 2014 and late 2015 were each followed by rather substantial price increases before the trend shifted in the opposite direction for the long-term. By comparison, the death crosses in early 2018 and late 2019 were followed by significant price drops before the trend reversed.

While a death cross can certainly be informative in identifying whether the long-term trend for Bitcoin will shift into a bear market, it is far from a perfect indicator by itself. Any serious technical analysis should look at a variety of on-chain and off-chain factors to get a better sense of potential future performance for Bitcoin’s price. Here are a couple that I’ve been looking at this past week:

Digital Asset Fund Flows

Market commentators have stated quite frequently that the current bull market is being significantly influenced by an influx of investment by institutions like hedge funds and corporations. This is in contrast to previous bull markets, which were largely driven by demand from retail market participants like you and me. Perhaps it came as no surprise then that the recent price trough for Bitcoin was accompanied by outflows totaling in the hundreds of millions USD from Digital Asset Funds, which are almost exclusively accessed by institutional and accredited investors. However, the latest weekly analysis from CoinShares shows that Bitcoin outflows have slowed significantly and may be on the verge of turning positive again:

Whether or not you believe that institutions are responsible for the current bull market, they do represent a significant amount of supply and demand for Bitcoin, depending on whether they’re net sellers or buyers. Positive news on the demand front for institutions represents positive news for Bitcoin’s short- and long-term price trend.

Long-Term Hodler Behavior

If you want to understand how people’s perception of Bitcoin’s long-term trend may have changed, look at the behavior of Bitcoin’s true believers, the long-term hodlers. Long-term hodlers have often invested a significant amount of time in understanding Bitcoin’s value proposition and typically have placed a substantial percentage of their portfolio into Bitcoin. Most of them have been around through at least one bull and bear market cycle, and have sufficient experience to hold strong through arbitrary short-term price changes.

As seen in the chart below, long-term hodlers have been steadily re-accumulating Bitcoin throughout the last two months since Bitcoin hit its all-time high. Their behavior indicates that long-term hodlers as a whole do not believe that the current bull market has hit its peak. Instead, they have taken the opportunity to buy the dip.

Hindsight is 20/20

Technical analysis is only as good as the indicators that we have available to us and can be completely invalidated by any amount of bullish or bearish news outside the charts. That said, it’s important to review a variety of indicators together in order to formulate a more complete picture of where Bitcoin has been before trying to make an educated guess as to where it might go. Death crosses and other indicators can be helpful in this regard, but remember that they are far from perfect. Each of us should be willing to do our own research and make our own choices when it comes to investing in Bitcoin and cryptocurrency.

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