Bear markets have always been challenging to navigate in the past, and the usual set of “reliable” indicators that identify good entry points cannot predict how long the crypto winter might last.
Bitcoin (BTC)’s recent recovery above the psychologically important price of $20,000 is a sign to a bottom is looming, but diving deeper into the data suggests that the short-term relief rally may not be enough proof of a macro-level trend change.
Evidence pointing to caution was provided in a recent report by crypto research firm Delphi Digital, which suggested that “we need to see a little more pain before we have conviction that a market bottom is in.”
Despite the sharp drop that has occurred since Bitcoin’s ATH in November 2021, a comparison with the 2017 market high suggests a further decline in the short term.
During previous bear markets, BTC price fell about 85% from its peak to the bottom during the last bear cycle. According to Delphi Digital, if history repeats, it would translate into “a low just above $10,000 and another 50% drawdown for current levels.”
The outlook for Ether (ETH) is even worse as the previous bear market saw its price drop 95%. If a similar scenario occurs, the price of Ether could drop to as low as $300.
According to Delphi Digital:
“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.”
For traders looking for bottoms in the current market, the data suggests that “previous major market bottoms coincided with extreme oversold conditions.”
As shown in the weekly chart below, BTC’s 14-week RSI has recently dipped below 30 for the third time in history, with the two previous occurrences coming near a market bottom.
While some might see this as a good sign to re-enter the market, Delphi Digital offered a warning to those expecting a “V-shaped” rally “In the prior two instances, BTC traded in a choppy sideways range for several months before finally staging a strong recovery.”
The view on the 200-week simple moving average (SMA) has also raised questions about whether historical support holds again.
Bitcoin recently broke below the 200-week SMA for the first time since March 2020. Historically speaking, BTC’s price has only traded below this level for a couple of weeks during previous bear markets, which shows the bottom may be hit soon.
The final capitualation
What the market is really looking for right now is the final capitulation that marks the end of one bear market and the start of the next cycle.
While market sentiment is at its lowest level after being affected by COVID-19, it has yet to reach the depths of despair seen in 2018.
As stated by Delphi Digital:
“We may need to see a bit more pain before sentiment really bottoms out.”
The pullback of the crypto market has been clearer since late 2021, but the real driving forces behind the market crash include explosive inflation and rising interest rates.
Rising interest rates tend to be followed by a market correction and as the Federal Reserve intends to maintain the hiking rate of increase, Bitcoin and other risk assets are likely to correct further.
Some metrics suggest that the final capitulation event that needs to happen is the bounce-back of BTC supply percentage, which reached as low as 40% during previous bear markets.
This metric is currently sitting at 54.9%, according to data from Glassnode, which proves the view that the market could still experience another drop before the bottom loom.
Disclaimer: This article is for reference purposes only, not investment advice.
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