The cryptocurrency space is currently booming. Back in December, the question on everyone’s lips was whether bitcoin could break above its former all-time high at 20k and remain there. This would provide some confidence that a real crypto bull market was upon us. Unlike the failed break above 14k during the summer of 2019, bitcoin did in fact tear through those former highs and has hardly looked back since. It’s currently sitting at around 54k with a recent high at around 57k, so naturally, the new question on everyone’s lips is whether this is the top, or if not, where the top could possibly be. Since all kinds of theories get thrown around when price action goes parabolic, in the following article, we’d like to present some of the concrete facts about bitcoin’s past performance. Hopefully, these observations will serve as a jumping-off point for your own research and provide some insights as to how early/late in the cycle we currently are.
Bitcoin is correlated with Bitcoin
If you spend some time with bitcoin’s chart, you’ll start observing that at times it appears to be positively correlated with the US stock market, while at other times it looks like it is negatively correlated; on occasion, it leads it, while sometimes it follows it. During the broad sell-off we saw across asset classes last March, the S&P led, losing some 35% of its value in the month between February 24 and March 23. Even though the S&P dropped first, Bitcoin’s own sell-off was larger and shorter-lived; it took 6 days for bitcoin to drop around 58% between March 7 and March 13.
In the recent correction from Bitcoin’s new 57k all-time high, bitcoin appears to have led stocks, the sell-off having started on February 22. Meanwhile, the S&P’s own correction came on February 25, following a spike in the US 10-year treasury yield to 1.61% on the same day.
Whether the correlation is positive or negative, whether bitcoin leads or lags other markets, the one certainty is, that bitcoin is governed by its own internal halving cycle in which the amount of newly minted coins per block halves every four years to a final supply of 21 million units by the year 2140. This was the main driver of price action back in 2017, and it’s also why, true to form, four years later we’re experiencing another surge. However, to suggest that this makes bitcoin an uncorrelated asset as many have over the past year or so, is to overlook the fact that as it gains adoption, particularly in the institutional space, it can’t help but participate in the broader market shocks like it did last March.
The 20-Week Moving Average
Where bitcoin’s price finds itself in relation to its 20-week moving average has historically been a reliable indicator of what type of market environment we are in. When it finds support at the 20-week MA we are in bull market territory. When it breaks below it and starts bumping up against it as resistance, more often than not, more selling is in store. Of course, you could make such a case for other markets, but it’s astonishing just how much respect bitcoin’s price seems to have for that line when it starts to reprice 6-9 months after a halving occurs.
During the last cycle, bitcoin remained above its 20-week moving average from the end of 2015 all the way to the start of 2018 when it finally broke below it. This was also the beginning of bitcoin’s two-year-long bear market that saw it correcting by over 80% peak to trough. Depending on where you count from, last time we saw 5-7 price corrections down to the 20-week MA, where each time it acted as support and heralded further upside gains. During this bull market, we have yet to see a single correction to the 20-week moving average. Make of this what you will, but if the past is prologue, then we should have larger dips in store as well as surges to new all-time highs.
Every week that goes by without a reversion to the mean causes the 20-week MA to rise towards the current price action. At the time of writing, bitcoin’s 20-week MA is sitting just shy of 28k, the highest it has ever been in the history of the asset. This 28k level should clue you into just how far bitcoin could drop were it to test that 20-week MA.
Altcoin performance as a measure of risk tolerance
Just as occurs in traditional markets, in good times investors find themselves venturing out further into risky territory. They take profits on their safest bets and allocate a portion of this capital to more speculative plays. This is how emerging markets come to outperform developed ones at certain key points in the economic cycle. Crypto is no different, with altcoin speculation taking place once a firm bullish trend has been established in the broader market. In 2017, the best performing cryptocurrency wasn’t bitcoin itself, but ether, which topped-out about a month after bitcoin touched its then all-time high. It’s useful to pay attention to this dynamic, even if you don’t trade anything other than bitcoin; it can clue you into when the market is in danger of becoming overly euphoric.
Furthermore, paying attention to which altcoins during the bull run actually gain ground against bitcoin when bitcoin sells off can be a valuable early sign of the strongest names in the space. The last time around it was ether. This time ether is behaving more like bitcoin itself rather than an altcoin and there are other names that are gaining against both bitcoin and ether when these two leaders of the crypto space consolidate. ADA and DOT, for example, have been behaving in such a manner since the beginning of the year and have rapidly risen to the top of the market cap rankings as a result. Pay attention to this dynamic.
The macro picture appears to be favouring hard assets well into 2021. This is perhaps a fundamental reason why bitcoin and its peers may have a lot further to run in this cycle. As we have seen above, the technical picture also suggests further upside in store. That’s not to say that some geopolitical calamity couldn’t pull the rug out from under the crypto market like COVID-19 did last spring. This may be one thing that bitcoin investors are overlooking. Nevertheless, with us yet to see a major correction to that all-important 20-week MA, it looks as though we may still be in the early innings of this current bullish phase.