Tristram Waye for Bitvo | Feb 2, 2023
After a substantial lift in crypto, it begs the question, was that the bottom?
- The answer, of course, is no idea. Because bottoms are not events but rather a process. After a challenging crypto winter, the relief is welcome, but the question of whether it’s over requires some evidence.
- This lift might be what is known as a bear trap. Bear traps entice buyers before heading back down.
- On the other hand, it might be the beginning of a new trading range for bitcoin and ether.
- So let’s have a look at some things that might tell us about where we are and how to use what we discover.
See: Is Crypto Bouncing Back, or Bull Trap?
- Be careful picking market tops and bottoms
- Jesse Livermore: “One of the most helpful things anyone can learn is to give up trying to catch the last eighth —or the first. These two are the most expensive eighths in the world. They have cost stock traders in aggregate enough millions of dollars to build a concrete highway across the continent.”
- So on the upside, this means picking tops, getting on the short side too early and getting squeezed.
- On the downside, it means catching falling knives trying to pick the bottom.
- In both cases, the financial impact is clear. But there is the psychological component as well. And this can present a bigger problem in some ways.
See: Learn to Love Those Bear Market Rallies
- Signals and sentiment:
- The press will post stories on the cover of their magazines and newspapers. And they are almost always wrong.
- But the response to bad news becomes important to watch. Any negative news that doesn’t generate downside should be examined.
- Sentiment is an interpretation of the bullish or bearish lean of various participants. Crypto has an enormous range of voices coming from a wide variety of content. And Twitter is a great place to get a gauge of sentiment. Here is where you can take a wide view of the voices around the space.
- Another sign of a bottom is the reaction to bad news. On the way to the bottom, every bit of negative news results in selling. The bias eventually becomes sell any story or rumor. We saw the last batch of selling occur with the FTX debacle. But since then, selling has been rather muted.
- At the bottom, negative news has little or no impact. Sellers no longer care. Lots of the sell side overhang is eaten up. And the response to news starts to change. Near the bottom, negative news goes from bearish to bullish.
- The demand for leverage will be low at the bottom and will have limited availability. Risk parameters at exchanges will also be relatively tight at the bottom. So even if you want leverage, and are fine with the cost of capital, the amount of leverage available and the margin required is likely quite a bit higher. Less leverage will mean less risk of downside liquidations.
- Bitcoin seems to be trading in a loose inverse relationship relative to the DXY.
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