Bitcoin is in a consolidation phase at the moment, going back and forth around the $85,000 level. This time of relative calm might seem reassuring. We can’t analyze if it’s a positive indicator of maturity or an ominous harbinger of eventual instability. As a reporter who has gone down the rabbit hole of finance, I know that periods of market calm are usually hiding a lot of danger underneath.
OverTraders.com, our site is focused on helping traders and investors like you, find the information that’ll help you avoid these kind of complexities. We prepare you with the tools and understanding that will help you best address the challenges and opportunities of today’s markets. Though others may take stability as an optimistic signal, I am less sanguine. Critics argue that extended consolidation can be an indication of weakness underneath – much more susceptible to a shock from an unexpected price collapse.
Bitcoin’s price stability usually comes after the halving event. This important event occurs roughly every four years. This unique event reduces the reward miners get by 50% when they add a new block to the blockchain ledger. Consequently, it cuts in half the number of new Bitcoins that are released into circulation. In theory, this lowered supply should force prices up in production cities, but the short-term results are more complicated.
Looking back, I remember how excited everyone was when the last halving came. Everyone was expecting tanking the price overnight. Instead, the market spent nearly all of February and most of March in a bullish consolidation phase before steadily trending higher. This experience has made me appreciate the need to look beyond dogmatic stories and examine the larger market picture.
Gold, traditionally the world’s safe-haven asset, plays an important role in Bitcoin’s price movements—particularly in times of economic turmoil. When gold prices are going up really quickly, a lot of investors will want to move their money into Bitcoin and vice-versa. Keeping an eye on this dynamic is key to understanding Bitcoin price movements.
One final thing to keep in mind — how hot the Bitcoin market is. In addition, traffic patterns on Google search and Wikipedia can show people’s willingness to adapt to social distancing. High search volumes often coincide with price bubbles, while declining interest may indicate a period of consolidation or even a potential downturn.
In these months I learned that the Trade-Exchange ratio is a very useful indicator. It’s measuring the volume of Bitcoin traded on exchanges relative to the circulating supply. A high ratio indicates robust demand, whereas a low ratio can be an indicator of fading enthusiasm. Though this data is not always statistically significant, it gives researchers another clue to the puzzle.
The Financial Stress Index (FSI) is another metric to keep an eye on. The FSI is designed to capture an aggregate level of financial stress in the market. Increased stress is creating new volatility in BTC prices. The catalyst for this new volatility seems to be the increasing stress. In response, investors rush into safe-haven assets and sell off riskier investments.
For now, the consolidation period near the $85,000 mark is allowing bearish sentiment to press down on the market. Many investors remain skeptical as to whether Bitcoin’s breakout is sustainable, and this doubt is evident in the price movement. Bitcoin is having a tough time attempting to regain the cluster of the 200-day MA/EMA. This lack of ability increases worries of more downside pressure and continues to fan a developing bearish fire.
I think price action right now is still very much stuck in the range and undecided overall, with the bears still firmly in control on balance. Even more important, the investor and trader outlook on the world’s top cryptocurrency asset has changed dramatically. Needless to say, many are currently feeling bearish about the cryptocurrency’s future. It’s a complete reversal from the heady boom days that marked previous cycles.
From what I’ve seen, when the markets are enjoying low volatility, high volatility is right around the corner. The converse is equally true. High volatility tends to be followed by lulls. Given this cyclical nature of the market, the current period of consolidation is not likely to last for long. The better question is, what’s going to cause the next big price swing.
When we turn our eyes toward historical data, it’s evident how much Bitcoin’s price has rallied after each halving. The timing and magnitude of this increase can be very different. The Appreciation Phase is usually followed by the Acceleration Phase. What usually happens out of this phase under one-year realized volatility goes under the fifth percentile, over 95% of addresses are in profit. This Acceleration Phase is characterized by high volatility and extreme profitability. It usually comes on the heels of a period of very low volatility.
I have seen anecdotally and personally that Bitcoin’s price tends to go up after a period of low volatility. It is likely to decline after periods of high volatility. That concentration indicates that the present period of consolidation may indeed be a prologue to a big thrust higher. At the same time, there are a number of red flags that indicate need for caution.
An invalidation level, such as breaking below the 200 EMA level, for instance, would imply the current upward trend is over. Inability to maintain bullish momentum for a breakout above $91,000 and $102,000 is worrisome. The US dollar is continuing to rebound from its mid-December Easter egg lows. At the same time, Wall Street is tumbling for the second day in a row, which may add selling pressure onto non-interest bearing assets such as Bitcoin.
My biggest fear is the prospect of us cracking below that all-important $95,000 support/psychological level. If so, this could set off a political and financial tsunami of a sell-off. Arthur Hayes believes it could lead to a “goblin town” situation, where prices crash. While extreme scenarios are unlikely to come true, they are an excellent illustration of the point. Disclaimer: Investing in cryptocurrencies is a high-risk activity.
All of these points considered, I think it’s critical to be very circumspect about the current merger consolidation phase. Although the opportunities to reap those benefits in the years to come are undeniable, so are the risks. Investors, as always, need to assess their own risk tolerance and build a diversified portfolio that matches. If you’re serious about harnessing technology and making more data-driven decisions, staying informed and keeping tabs on important market indicators is key.
Some see the recent stability in Bitcoin’s price as a sign that the world’s first cryptocurrency is maturing. It might be the quiet before a historic storm. Only time will tell which of these ultimately comes to pass.
