Joel Frank
Cryptocurrency prices have turned sharply lower on Wednesday. According to CoinMarketCap, total market cap was 2.6% in the last 24 hours, amid a 3.1% drop in Bitcoin, a 3.4% drop in Ethereum and 2-5% price drops in the likes of BNB, ADA, MATIC, MATIC, DOGE, DOT and SOL over the same timer period.
Prior to Wednesday’s drop, Bitcoin had been forming a short-term ascending triangle pattern that some technicians had been predicting would result in an upside breakout and rally towards the next major resistance area around $28,000. These bullish forecasts have not come to fruition, with the cryptocurrency instead dropping below its short-term uptrend and falling back under $24,000, with bears now eyeing a test of the 21-Day Moving Average in the $23,200s.
Here’s Why Crypto is Dropping
Crypto’s pullback on Wednesday is being driven by risk-averse broader macro flows. US stocks have been pulling lower, with the S&P 500 recently dropping below a medium-term bullish trend channel and its 21-Day Moving Average, amid an uptick in 1) fears about an incoming earnings recession after weak Walmart and Home Depot earnings and 2) fears about ongoing rate hikes from the US Federal Reserve.
Though weaker in recent weeks, crypto tends to have a strong positive correlation to US stocks, particularly big tech names. The US dollar, meanwhile has been strengthening amid the ramp-up in Fed bets and the DXY is looking bullish from a technical perspective following a recent breakout above a medium-term bearish trend channel.
US yields, though lower as traders seek safety in bonds on Wednesday, have also pushing higher in recent weeks, again a result of heightened Fed tightening bets. For reference, a string of strong US data reports out this month, like the January jobs, ISM PMI surveys and inflation data, as well as more recently flash February PMI figures, have pushed markets to price in more Fed interest rate hikes this year.
Where a few weeks ago markets were betting that the Fed would lift interest just once more in March (to the 4.75-5.0% range), the markets base case is now for an additional two interest rate hikes beyond that (to the 5.25-5.5% range), as per data from the CME. Crypto tends to have a negative relationship with a stronger US dollar and higher bond yields, the latter of which raises the opportunity cost and lowers the incentive of holding “risk-sensitive” assets (a category most macro investors deem crypto as belonging to).
Can Crypto’s Resilience to Macro Headwinds Continue? Recent Golden Crosses Suggest Yes
But these headwinds aren’t really anything new. US stocks have been struggling now since the beginning of the month, with the S&P 500 now down around 1.5%. Bitcoin, meanwhile, is still up around 2.6%, with crypto having demonstrated significant resilience in recent weeks to macro headwinds.
That can partially be explained by a growing laundry list of on-chain and technical indicators that have been turning bullish for major cryptocurrencies like Bitcoin in the last few weeks. One bullish signal that a lot of investors recently got excited about for Bitcoin was its recent “golden cross”, a phenomenon where the 50DMA crosses above the 200DMA.
That was only Bitcoin’s seventh in the last 10 years. Some analysts see a golden cross as a buy signal, or at least include it in the suite of technical and other indicators that they monitor when making trading decisions. Both the 50 and 200-Day SMAs are widely followed technical indicators by investors, hence a golden cross could potentially lead to higher buying pressure in the Bitcoin market, should it encourage more buyers to enter the market.
With the golden cross now confirmed, many investors are asking whether this is a good buy signal. The short answer is “not necessarily”. Golden crosses have a mixed history of success as a Bitcoin buy signal. If you were to have bought Bitcoin at the time of each of the last seven golden cross events and held for 90 days, you would have been up on your investment four out of seven times. The margin of these gains would have varied wildly between 10-80%. One time out of seven, you would have been flat after 90 days, and on two occasions you would have been down (by 20% and 45%).
If you were to have held for 365 days, you would have been up five out of seven times. Again, the magnitude of gains over this time period varies wildly from 25% to 400%. The two occasions when you would have been down after 365 days coincided with the brutal bear markets of 2014 to early 2015 and of late 2021 into late 2022.
However, if you tweak the buy signal and only buy when a golden cross happens after the 50-Day SMA has been below the 200-Day SMA for a prolonged period of time (i.e. the golden cross happens after a Bitcoin bear market, not during a choppy bull market), the results are arguably more bullish. If you bought and held for 365 days after the July 2015, October 2015 and April 2019 golden cross events, you would have returned a respective (roughly) 130, 120 and 25%.
As in these aforementioned occasions, the latest golden cross has happened after the 50-Day SMA had been underneath the 200-Day SMA for a prolonged period of time. Given historical precedent, a 100% gain in the next year is feasible. In other words, we could easily be talking about Bitcoin hitting the mid-$40,000s in early 2024.
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This article was written for Business 2 Community by Joel Frank.
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