Bitcoin is showing signs of weakness after an impressive start to the year. BTCUSD has increased precisely by 100% from its low on November 21st to its high on April 14th. Coincidentally, April 14th was also the exact same date that Bitcoin hit its first new all-time high after the Covid low. A 50% correction followed this peak going into the summer months. This time, it looks like history might be repeating itself, which raises the following question: Are we seeing the early signs of a Bitcoin bleed?
Why This Might Be the Case
We can trace parallels to the 2019 bull run, which saw Bitcoin rise explosively before entering a slow bleed. This descent was triggered when the 30-day Exponential Moving Average (EMA) crossed below the 60-day EMA and the daily price closed below the 20-week Simple Moving Average (SMA). Now, these same indicators are flashing red flags again.
Further insight can be gleaned from monthly Heikin Ashi candles, which help to eliminate market noise and clarify trends. We recently closed a green Heikin Ashi candle, making it a lower high. This is important because the 2019 bull run ended after we got the first green lower high following 4 consecutive green higher highs.
If we shift our attention away from 2019 and concentrate on the current bull run, it becomes apparent that Bitcoin's rise can largely be attributed to its absorption of liquidity from the broader cryptocurrency market. This idea is supported by the strong uptrend in Bitcoin's dominance, which seems poised for an upward breakthrough. This trend, along with a shift of liquidity towards perceived safer assets like Bitcoin and Ethereum, strengthens this assumption.
Bitcoin's dominance appears even stronger when we exclude stablecoins from the calculation.
A glance at the altcoin market (excluding stablecoins) supports this view. The altcoin market is currently only up by 20% since its low, while Bitcoin still sits at 65% from its low. This reinforces the idea that people are converting their altcoins into Bitcoin and Ethereum.
So where is the rest of the liquidity coming from? Predominantly from the stablecoin market, which has decreased by 35 billion dollars since May 2022. A reasonable assumption would be that a significant portion of this decrease has flowed into Bitcoin and Ethereum, considering their continuous outperformance since May 2022.
The Potential Liquidity Crunch
Here's the issue: there's a lack of fresh liquidity entering the cryptocurrency market. The current bull run seems to be driven more by existing liquidity (from altcoins and stablecoins) than new inflows. As this existing liquidity dwindles, Bitcoin might struggle to sustain its rally, potentially leading to several months of stagnation until new capital enters the market.
The Role of the Federal Reserve
Whether new liquidity will enter the market depends heavily on the Federal Reserve's stance on monetary policy. An environment of cheap liquidity is Bitcoin-friendly, attracting investors to riskier assets in search of high rewards. For a substantial bull run to be sustained, a significant influx of fresh capital from new investors is crucial.
So when is the Fed going to stop draining liquidity out of the economy? The answer isn't straightforward and depends largely on efforts to control inflation expectations. So far, inflation expectations have been trending lower, suggesting a possible pause in rate hikes followed by rate cuts. This could potentially lead to the initiation of Quantitative Easing and therefore an increase in net liquidity. Such a scenario would definitely be beneficial for all assets, including Bitcoin. However, this appears to be highly unlikely in the near future.
Additional Factors to Consider
Despite the possible lowering of interest rates, investors may still remain cautious, since this will imply the steepening of the yield curve. This has historically always triggered a recession, which is always accompanied by a sharp decline in risk assets.
Furthermore, if the overheated NASDAQ experiences a cooldown, it could potentially impact the overall market, including cryptocurrencies. Bitcoin typically shows strong correlation with the NASDAQ during downtrends.
Lastly, the DXY, or U.S. Dollar Index, could also pose a risk if it breaks its current downtrend and instead starts climbing higher. It's crucial to remember that the DXY is inversely correlated with Bitcoin's price movements. This suggests that a surge in the dollar's strength could precipitate a sell-off in riskier assets, such as cryptocurrencies.
Conclusion: A Time for Caution and Opportunity
The signs point towards a possible crypto slowdown until capital becomes more available. Such a sideways market scenario might be detrimental for the impatient investor, but it could present great opportunities for the patient long-term investor.
With this in mind, if you choose to maintain a stake in crypto, Bitcoin should likely be your safest bet due to potential severe impacts on the altcoin market from a crypto liquidity crunch. This could lead to a decline in most Bitcoin pairs, including the ETHBTC pair, which has stagnated for over two years and lacks compelling reasons to maintain its current elevated level.
Predicting the future remains a challenging task. However, considering the current high-risk climate, it might be prudent to maintain a cash reserve on hand, consider increasing your Bitcoin holdings, and perhaps ponder over establishing a new position in Ethereum over the upcoming months.
Disclaimer: This article is intended for informational purposes only. It is not intended to be investment advice. Every investment and trading move involves risk, and you should conduct your own research when making a decision. Past performance is not indicative of future results.
Why This Might Be the Case
We can trace parallels to the 2019 bull run, which saw Bitcoin rise explosively before entering a slow bleed. This descent was triggered when the 30-day Exponential Moving Average (EMA) crossed below the 60-day EMA and the daily price closed below the 20-week Simple Moving Average (SMA). Now, these same indicators are flashing red flags again.
Further insight can be gleaned from monthly Heikin Ashi candles, which help to eliminate market noise and clarify trends. We recently closed a green Heikin Ashi candle, making it a lower high. This is important because the 2019 bull run ended after we got the first green lower high following 4 consecutive green higher highs.
If we shift our attention away from 2019 and concentrate on the current bull run, it becomes apparent that Bitcoin's rise can largely be attributed to its absorption of liquidity from the broader cryptocurrency market. This idea is supported by the strong uptrend in Bitcoin's dominance, which seems poised for an upward breakthrough. This trend, along with a shift of liquidity towards perceived safer assets like Bitcoin and Ethereum, strengthens this assumption.
Bitcoin's dominance appears even stronger when we exclude stablecoins from the calculation.
A glance at the altcoin market (excluding stablecoins) supports this view. The altcoin market is currently only up by 20% since its low, while Bitcoin still sits at 65% from its low. This reinforces the idea that people are converting their altcoins into Bitcoin and Ethereum.
So where is the rest of the liquidity coming from? Predominantly from the stablecoin market, which has decreased by 35 billion dollars since May 2022. A reasonable assumption would be that a significant portion of this decrease has flowed into Bitcoin and Ethereum, considering their continuous outperformance since May 2022.
The Potential Liquidity Crunch
Here's the issue: there's a lack of fresh liquidity entering the cryptocurrency market. The current bull run seems to be driven more by existing liquidity (from altcoins and stablecoins) than new inflows. As this existing liquidity dwindles, Bitcoin might struggle to sustain its rally, potentially leading to several months of stagnation until new capital enters the market.
The Role of the Federal Reserve
Whether new liquidity will enter the market depends heavily on the Federal Reserve's stance on monetary policy. An environment of cheap liquidity is Bitcoin-friendly, attracting investors to riskier assets in search of high rewards. For a substantial bull run to be sustained, a significant influx of fresh capital from new investors is crucial.
So when is the Fed going to stop draining liquidity out of the economy? The answer isn't straightforward and depends largely on efforts to control inflation expectations. So far, inflation expectations have been trending lower, suggesting a possible pause in rate hikes followed by rate cuts. This could potentially lead to the initiation of Quantitative Easing and therefore an increase in net liquidity. Such a scenario would definitely be beneficial for all assets, including Bitcoin. However, this appears to be highly unlikely in the near future.
Additional Factors to Consider
Despite the possible lowering of interest rates, investors may still remain cautious, since this will imply the steepening of the yield curve. This has historically always triggered a recession, which is always accompanied by a sharp decline in risk assets.
Furthermore, if the overheated NASDAQ experiences a cooldown, it could potentially impact the overall market, including cryptocurrencies. Bitcoin typically shows strong correlation with the NASDAQ during downtrends.
Lastly, the DXY, or U.S. Dollar Index, could also pose a risk if it breaks its current downtrend and instead starts climbing higher. It's crucial to remember that the DXY is inversely correlated with Bitcoin's price movements. This suggests that a surge in the dollar's strength could precipitate a sell-off in riskier assets, such as cryptocurrencies.
Conclusion: A Time for Caution and Opportunity
The signs point towards a possible crypto slowdown until capital becomes more available. Such a sideways market scenario might be detrimental for the impatient investor, but it could present great opportunities for the patient long-term investor.
With this in mind, if you choose to maintain a stake in crypto, Bitcoin should likely be your safest bet due to potential severe impacts on the altcoin market from a crypto liquidity crunch. This could lead to a decline in most Bitcoin pairs, including the ETHBTC pair, which has stagnated for over two years and lacks compelling reasons to maintain its current elevated level.
Predicting the future remains a challenging task. However, considering the current high-risk climate, it might be prudent to maintain a cash reserve on hand, consider increasing your Bitcoin holdings, and perhaps ponder over establishing a new position in Ethereum over the upcoming months.
Disclaimer: This article is intended for informational purposes only. It is not intended to be investment advice. Every investment and trading move involves risk, and you should conduct your own research when making a decision. Past performance is not indicative of future results.