To Bear or Not to Bear?
Updated: May 19, 2021
When Elon's tweets seem to move the market and price hits a 3-month low, we all have questions. Have we seen the top? Is this like 2019's run? Should I sell my position and run to the best alt-coin? Should I cash out and run for the mountains to hibernate with the other bears?
Let's talk about some Bear & Bull arguments for Bitcoin. This article will discuss Bearish FUD, Bearish interpretations of indicators, and some new indicators that show that Bitcoin could have topped (PI cycle & NVT). Then, the possibility of a Bear Trap will be considered. Finally, Bullish indicators will be introduced, including longer term technicals and supply/demand based indicators (Stock-to-Flow model, Realized Value HODL Waves, and Hash Ribbons). It's long because there's a lot of uncertainty in the air.
All around the media, you can find reasons to be Bearish. Bitcoin stocks (ex. BTBT, CAN, MARA & RIOT) and their affiliates (ex. MSTR) have broken their bullish trends so severely, one is reminded of the classic Stages of a Bubble figure. In fact, Growth Stocks - and the NASDAQ in general - seem to be pretty hated since February. It seems to have taken only a few misplaced words by a Treasury Secretary and fears of interest rates or inflation rising to spook everyone into "Value" investing. Is it any surprise to read that Michael Burry of ‘Big Short’ fame has a half a billion dollars short bet against Tesla!
Bearish TA & Indicators
Finding Bearish TA and indicators is easy too. A noob chartist can see that Bitcoin has broken its uptrend, made a lower high, and a lower low. With a bit more charting experience, the Bearish Divergences in daily RSI & PPO really stand out. And if you have a memory of the 2019 rally, you might even see the same pattern playing out today. Are we watching a dreadfully bearish fractal playing out before us?
More advanced methods are also showing Bear signals.
The Pi Cycle Top Indicator has had its moving averages cross, indicating Bitcoin topped in mid-April. It is reported that this indicator has historically been effective in picking out the timing of market cycle highs to within 3 days. That sounds impressive! Then again, this indicator was invented after each of those cycles - in 2019.
The Bitcoin NVT Ratio recently went from Red to White. This "Network Value to Transactions Ratio" is compared to a P/E Ratio for stocks. This change from red to white can be interpreted as the network no longer being in high growth mode. Not being in High Growth Mode is seen as Bearish. Other times this signal occurred resulted in tops or other major sell offs. Then again, this indicator was created in February 2017 and so it has only seen one official peak.
A more fundamental indicator that has been reliable for all of Bitcoin's Bull Runs is the 21-weekly Exponential Moving Average (EMA). This is a simple indicator that most traders have access to. This simplicity offers accessibility, while zooming out to a weekly view offers a slightly longer term perspective. As a rule, no Bitcoin Bull Run has ever closed a weekly candle entirely under the 21-W EMA and maintained an upward momentum.
The 2012 to 2014 Bull Run had two main thrusts upward after breaching the previous All Time High (ATH). After price got above the 21-W EMA in May of 2012, notice how the MA was support until early 2014. There was one significant red candle in June with a price close below, but the candle itself was not entirely below because it opened above. This was a Bear Trap. The following week, the MA was regained and the second upward movement began in earnest as price rallied from $90 to over $1100.
The 2015 to 2018 Bull Run was more complex. Notice how the 21-W EMA held as resistance until a double bottom in 2015. Afterwards, the EMA was re-tested at least seven times as price ran to near $20k. Not one candle sat below the EMA, even while there were many significant draw downs greater than 30%. Once a candle was printed fully below the EMA, a Bear Market began.
After peaking in late 2018, Bitcoin could not close above the 21-W EMA for over a year. In early 2019, a bottom was found. Notice that while price broke out to about $14k, the 21-W EMA was never realized as true support. Price fell below it during the 2020 market crash. Since rallying from this low, the 21-W EMA acted as support in mid-2020, but had not been touched since. That is, until a few days ago.
Price now sits below this EMA for the first time during this Bull Run. It is easy to see this as Bearish. Holy Guacamole - the sky is falling!
While it's reasonable to be cautious and practice safe trading, nothing has been confirmed by this indicator. This indicator requires patience. For this to be confirmed, price would need to not re-take the EMA before the close of the weekly candle on 30 May 2021. This could be a Bear Trap.
Can we find evidence of a Bear Trap? For starters, there is a lot of FUD in the media, YouTube, and forums. Looking around the market, we see more of this. Growth has been quite punished; TSLA has been called the most shorted stock in the world; Bitcoin has the greatest amount of unhedged short interest in over a year. With consensus being so bearish, could we see short-squeeze? After all, this much short interest has resulted in massive pumps recently. And now that short-Growth is the most crowded trade, do you want to be making this bet?
The Fear and Greed Index also provides evidence for the effectiveness of the doom and gloom narrative. The trend moved from making higher highs in Greed, to lower lows in Fear. The last time the market was this fearful was April of 2020 - with a price of about $7500. Take that in for a moment... The last time the market was this fearful was at the height of the pandemic lock-down and market crash... just before the most profitable pump many ever witnessed... When many were too afraid to join in.
Unfortunately, this data does not go back far enough to compare to other bull runs, making it impossible to make a direct comparison. For a different kind of reference, check out the headlines from September 2017, the price correction of that time (40.5%), and today's correction (40.8%). The biggest difference seems to be that our present pull-back stems from less dire headlines, while it has taken longer to realize. Perhaps there is wisdom in the adage, "be greedy when others are fearful."
But besides conjecture, can we find any Bullish Indicators?
Zoom Out to Monthly
One of the best things to do is to take a step back. Staring at the dollar figure on a screen or a 4-hour chart can really mess with perspective. Remember, Bitcoin is a decade old project with 4-year major movements. By zooming out to a Monthly chart, the Bull Runs make some very consistent patterns.
After breaking out past the previous ATH, price shoots up. After some time, it consolidates. The 2013 run had a period of five months of consolidation, with three monthly red candles. This sideways action creates the structure for the following bear market. Notice that the peak of the 2013 consolidation box acted as the base for the 2015 bear market. This pattern repeated in 2018 with a single red, monthly candle before the blow-off-top. And again, this consolidation box served as the base for the 2019 low. Is it any wonder that this run is consolidating? This price action will serve as the base for the 2022-2023 bear market.
Meanwhile, check out the RSI in purple. There are two distinct peaks in each of the previous Bull Markets. Today's run has only had one and is sitting at support. Meanwhile, the PPO has not crossed over to Bearish. Perhaps traders have been too spoiled by so many consecutive months of green candles to remember that corrections and consolidations are natural. Until the RSI or Consolidation Box is broken, there is still a Bullish thesis.
The Stock-to-Flow model treats Bitcoin as a commodity with a fixed and known supply, akin to gold, silver or platinum. The model shows that Bitcoin is sometimes over or undervalued, with price approaching the stock-to-flow value over time. According to this model, today Bitcoin is undervalued. In previous bull runs when it was undervalued, the following snap up was fast and resulted in an over-shoot. Meanwhile, if commodities are pumping and seen as a hedge against inflation, might Bitcoin also benefit?
Realized Value HODL Waves
The Realized Value is the price of unspent transaction coins when they were last moved from one wallet to another. The Realized Value HODL Wave indicator maps the movement of HODL'd coins. Theory is that more people will move their coins as price peaks. After all, people want to buy Lambos and need to pay rent, while they can always come back and buy the dip later. Notice, Bitcoin hodlers are not acting as though they believe this is the peak, and are happy to keep holding their coins.
Mining difficulty is adjusted about every two weeks, meaning that things get tougher and tougher for miners as competition increases. High prices bring more competition and more competition means more processing, and therefore more electricity is needed to mine Bitcoin. The Bitcoin hash ribbons indicator is an attempt to form a direct relationship between the hash rate and price. Miners should reduce their bitcoin mining efforts when an opportunity to get better results elsewhere occurs if the price has decreased or their mining costs (electricity) has increased. This miner capitulation is seen as a better bottom indicator than what Retail typically uses because miners are thought to be the last to quit. As such, this buy signal has always resulted in significant gains, even if in short term, bear markets. At present, Miners are capitulating and the signal has already begun. Generally, the best time to buy somewhere in the middle of the “miner capitulation” period - which is occurring now.
While there are lots of reasons to be fearful, remember the market has done this before and should do it again. I cannot give you financial advice and I am not a financial advisor. I only hope this bit of information provides some perspective and helps you make your own decisions.
Does this help? Have I left something off? What are you looking at to make your Bitcoin investing decisions?