Is bitcoin done? Or is it the best buying opportunity we will ever see again?
Bitcoin has tumbled below $7000 for the first time since February, by doing so, has entered one of the strongest bearish technical signals, the dredged “death cross.”
This is where the 50-day moving average crosses the 200-day moving average, what we would consider a negative technical indicator that’s associated with downward market trends. As indicated below, the 50-day moving average has just touched the 200-day moving average.
This can be significant in showing a continued decline and a lack of resistance to the downward trend, especially for traders who rely on price and volume charting for predicting pricing. It’s based on the belief that the market, stock, or in this case, cryptocurrency, will continue the trend with the same behavior. Those who believe in the death cross are looking for bitcoin to sell off, possibly all the way down to $3000 level.
The issue we have is that we have come all the way back from about $19,000 in December to under $7000, to reach the death cross. That’s a big move in a short amount of time! The 50-day moving average is also already surpassed the 100-day moving average, while the trend line continues to move lower.
Looking specifically at bitcoin, the death cross has more generally proven to be a lagging indicator, as opposed to a leading indicator, which is why putting too much weight into this technical trend would likely not pan out and could turn into what’s referred to as a bear trap, which is false signal that tricks investors into thinking the market is going to decline when it’s not. They get trapped or blindsided when the investment beings to recover.
In the case of bitcoin, in the last several years we have had the 50-day moving average cross the 200-day a few times.
- In April 2014, bitcoin hit the death cross after the fall of Mt. Gox, only to have the market turn around and spike the following month.
- In September of 2015, bitcoin once again hit the death cross, only to double in price the following month.
In these two previous two crossings, bitcoin failed to have that big sell off the death cross is supposed to indicate, in fact, it had quite the opposite effect. Those who trade with skittish intentions and pay close attention to hype will likely find themselves being a victim of a bear trap once again.
However, it’s also important to remember that when talking about bitcoin, we need to consider the fact that we don’t have a lot of history to go off of, so we have to consider only what we have available.
It makes for an interesting conversation, but most traders who were bullish on bitcoin to begin with, are still bullish, while the bears will use the death cross as an indicator to show how much more pain is likely to come.
Bitcoin is down 40% this year and for bargain-hunters who have been wanting to get in after a market pullback, it might not get better than this. For those people who liked bitcoin at $18,000, $14,000, $10,000, they should love it at the current price.
Considering the current innovations taking place in bitcoin, including the lightning network which is hailed to be one of the most important implementations to solve the scaling issue, allowing for cheap and quick transactions on the bitcoin blockchain. Combined with the fact that the CBOE is pushing the SEC for a bitcoin ETF by the end of the year, investing now, while sentiment is low, could turn out to be one of the best bitcoin buying opportunities we will ever see again.