Bitcoin (BTC) peaked at about $63 000 in April then traded all the way back to $30 000. Last week it had muscled its way back to $43 000, notwithstanding China’s recent ban on digital currencies.
Given that BTC peaked in April and then gave up nearly 50% of its value over the succeeding two months (before making a substantial recovery), the question arises: Are we amid a bull or bear market?
To help us answer this question, we are joined by Brett Hope Robertson (BHR), investment analyst at Revix.
How do we know when to call it a bull or bear market for cryptos?
BHR: There are different opinions about this. In traditional asset classes, a bear market is normally signified by a 30% drop in price. Obviously, in cryptocurrencies, a 30% drop is like a normal Wednesday afternoon, so the rules are a little different. Crypto seems to have the ‘buy the dip’ mentality, so we often see these 30% sell-offs bought right back up in a bull market. When so many people are buying with leverage, aggressive price swings creep in, and it becomes hard to see the signs of a bear market – even a 50% dip could be bought back up within a couple of weeks.
After the parabolic run-up in price earlier this year, it was inevitable that there would be some price pullback and consolidation. As much as people want BTC to continue going up – things don’t move in a straight line, but there is evidence to present that the crypto bull market is still intact for now.
From a macro perspective, on-chain data is showing bullish signs.
For one, the Bitcoin supply shock ratio is climbing to levels last seen when Bitcoin was at $57 000. This graph shows coins that have not moved in a long time (therefore considered unavailable) over coins that have been recently moved and therefore considered more available. This uptick shows long-term holders continue to hold and accumulate as the availability of coins reduce. Therefore demand/supply is pricing Bitcoin at $57 000 levels.
Another way to look at this is through ‘whale’ buying or selling pressures. ’Whales’ are people who hold more than 1 000 bitcoins. Whales are opportunists, when they foresee a period of bullish price action ahead, they are known to accumulate. We can see this below.
Technically, Bitcoin is looking a bit shaky. China’s ban on bitcoin mining drove Bitcoin price down to the low $30 000 level. We have since recovered a bit, but it seems we have made a lower high. This basically means buyers couldn’t get Bitcoin price above the previous high of $65 000, and now Bitcoin could be in a downtrend – forming lower and lower highs. With this being said, we have just seen the golden cross in Bitcoin – a notoriously bullish technical trading sign.
Crypto analysis is a relatively new discipline, and we are dealing with data that is just a few years old, unlike stocks where we have the benefit of decades of data.
Under normal circumstances, we might say that a 50% drop in price would constitute a bear market, but with a highly leveraged system, crypto’s price action becomes hard to read. From an on-chain view, we can clearly see bullish buying and increased demand. On this basis, I would argue we are still in bull territory.
Is it important to understand where we are in the cycle?
BHR: To know where we are going, you have to know where we have gone. Knowing where we are in the cycle is important since it allows us to develop an investment strategy that is more likely to result in profit than losses.
Bitcoin classically has a four-year cycle, and we are about halfway through this one. Typically, the bull cycle should be coming to an end by the end of this year, as it has done twice previously. If we’re in a bear market, we would be expecting steadily lower prices over a period of years into the future. I do not think that is a realistic scenario given the massive mainstream adoption we are seeing around Bitcoin and the fact that on-chain metrics are showing otherwise.
Yes, there will be corrections along the way, but if the past years are anything to go by, we should be in for an exciting end to the year.
If you don’t want to trade the market or worry about market swings, then dollar-cost averaging has proven to be an excellent way to accumulate Bitcoin. By that, I mean buying a regular amount of Bitcoin every month regardless of where the price is. I don’t believe people should be trying to time the market on a micro level. Experienced traders struggle to do this with all the resources at their fingertips, so I think it’s silly to think you could beat them. Most traders lose – they end up buying the tops and selling the bottoms. due to FOMO [fear of missing out] and panic respectively. What you can do is set a predetermined interval in which you add a set amount to our position constantly over time.
What about other cryptos like Ethereum (ETH), Solana (SOL) and Cardano (ADA). These coins are showing even more dramatic price performance when stacked up against BTC. Are these in a bull or bear market?
BHR: The same applies to these altcoins, which have an entirely different business case to Bitcoin. These are blockchain-based networks that are competing to become leaders in the new financial age. They range from exchanges to insurance and every financial sector in-between.
For the most part, altcoins and Bitcoin move together.
It’s like that old adage reinvented – ‘When Bitcoin sneezes, the rest of the crypto market catches a cold’. The only real difference being that these altcoins are a lot more volatile.
Basically – we take Bitcoin’s volatility, inject it with steroids, and we call them altcoins.
But how volatile are they, you might ask?
For example, while BTC fell about 50% since April, most if not all altcoins dropped over 65%.
The way to see the development of these altcoins over time is by tracking how much money they are attracting from the masses.
We measure this using Bitcoin’s market dominance percentage.
In other words, what share of the total crypto market is represented by Bitcoins market cap, and inherently the inverse is true for altcoins. Therefore, if Bitcoins dominance goes from 95% to 42%, then altcoins are soaking up money and attract investors to the point that their dominance has grown from 5% to 58% (inverse of Bitcoin dominance).
The above is currently true.
Bitcoin’s dominance stands at 42%, which is almost identical to May 2018 … interestingly enough, this was the point that the 2018 bear market was locked in. If we were to go into a bear market again, the same dominance chart would play out as Bitcoin outperforms altcoins in bear markets.
Knowing where we are in the cycle is important since we want to know whether we should be buying the dips (as we would in a bull market) or avoiding these coins altogether (as in a bear market). The beauty of this space is no one truly knows – we are all using the limited data we have (just over 10 years of history) to figure this out.
I think we are at an interesting divergence phase. Price data is possibly setting up for a bearish structure, while on-chain data shows bullish structures. There is the old saying, don’t listen to what they say, watch what they do … and whales seem to be buying.
Why do crypto prices fluctuate so aggressively?
BHR: This is a symptom of a relatively immature market and large amounts of leverage. The more mature an asset becomes, the less volatile its price action – and we can see this with respect to Bitcoin versus altcoins.
While people may think Bitcoin is like gold, in that it has similar properties, the data shows this not to be true. It has recently been acting more like tech than gold. Crypto itself is inherently seen as a risk-on asset, meaning that when there are shocks around the world, these assets get sold first due to them being attractive as a risky bet. When the world is in turmoil, such as the recent risk that the Chinese real estate developer Evergrande would default on its debt obligations, investors seek safe assets (risk-off assets).
Until such time as cryptos are further accepted, regulated and their income-generating networks render them easily valuable, I think cryptos will continue to be seen as risky assets.
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