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Thesis Summary
As inflation hits its highest since 1982, Bitcoin (BTC-USD) approaches the “death cross”, by which I mean the crossover of the 50 and 200 day moving averages. This has happened a few times already, most recently in July, and it was contrary to intuition a bullish signal. On top of that, we have some evidence from on-chain metrics that suggest Bitcoin could experience a short-squeeze but also point to the fact that retail is losing interest while HOLDers continue to accumulate.
Lastly, I point out the key levels to watch out for moving forward.
The Dreaded Death Cross
A death cross occurs when the 50-day moving average crosses below the 200 days moving average. It can be seen as a signal that market sentiment and momentum is shifting since this happens when the price has seen a sustained downwards trend. We saw a death cross in Bitcoin back in mid-July 2021.
Death Cross
We can see an interesting dynamic played out when this happened last. Leading up to the cross, Bitcoin reversed course significantly going from close to $32,500 to over $40,000. As the death cross took place, Bitcoin fell and hit a short-lived bottom of around $29,000. However, while this was technically a bottom, it is interesting to note that Bitcoin bounced back and then continued consolidating in a downwards trend for almost a month. Following this, Bitcoin rallied strongly in August and September.
As I write this, Bitcoin is nearing the death cross again, but it is putting in a strong reversal, currently trading near $43,600. The question is, where do we go from here? Will recent history repeat itself? Some further insights can be gathered by looking into on-chain metrics.
On-chain metrics
Looking at some on-chain metrics, I would argue that we may see Bitcoin playing out similarly as it did back in June.
First off, it’s important to note that open interest in Bitcoin is once again at dangerously high levels, close to where it was back in April, but still below the all-time high set as we topped in November. This situation increases the likelihood of a squeeze, which could probably be of the short type. This is already happening to an extent, but we could see a further move up. Leading to the July death cross, Bitcoin rebounded over 20%, before resuming to a downtrend and finding new lows.
On another note, on-chain metrics are seeing much smaller short-term/retail activity, while Holders continue to accumulate. One metric that shows this is the Net Hodler position change.
One way to see this dynamic is through Hodler Net Position Change, which is the rolling 30-day change in coin maturation. As units of BTC age and mature in investor wallets, they accrue Coin Days, which are ‘destroyed’ upon spending and help to produce various lifespan metrics.
Source: Glassnode
What we are seeing right now are coins maturing/getting older. In other words, coins are not changing hands, signaling a lack of volume and activity by retail investors. Typically this is a bearish indicator. It signals a consolidation phase where the smart money accumulates. However, I expect this will be followed by another leg up.
The question is, how long will we consolidate for? Back in July, Bitcoin traded down for around a month following the death cross. This could be enough time for metrics to reset and another bull run to take place.
We have indicators that we will see a short-term pop, based on open interest, followed by a consolidation phase, based on coin maturation. Just like the last time the death cross appeared.
What to expect moving forward
So, we have a theory, but how do we put it into practice in terms of possible buy/sell levels? The chart below shows some parameters and my primary expectations.
Bitcoin Key Levels Author’s Work
For now, the $44,000 level is the line in the sand. If bulls can push past it, I believe it could trigger the short squeeze I was talking about, which could take Bitcoin back to $46,000. Following this, however, I would expect to see a continued downwards trend. The net support down is $34,000 followed by $30,000. I think this would be as low as we go, and a good place to add.
This is assuming that the death cross plays out like it did last time. I am not trading Bitcoin at this point and will be adding if we break support.
Takeaway
A lot of people these days are calling for the beginning of the crypto winter, a theory that I have talked about before. But wouldn’t this be too easy? The market has a habit of surprising people when they think they know what is coming. I do think we will see a bear market eventually, but overall, Bitcoin has become too entrenched in the system to see the kind of crash we saw in 2018. If I am wrong, I’ll be loading up over the next few months. Though accumulation is taking place now, I think Bitcoin will see one more leg up before it “crashes”. If this plays out like the last death cross, a nice bull rally is in the cards.
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