Bitcoin is losing momentum and at present, traders are struggling to hold one of the most crucial key resistance/support level of $30,000. The leg up to $31,000 after 2 weeks of consolidation (Green Box) comes as no surprise but was shortlived as momentum indicators clearly suggested that the rally was running out of steam.
Like it or hate it, Bitcoin has rallied by almost 2x since touching its lows of $15,000. This should warrant some attention as it is a type of rebound that isn’t so commonly seen amongst many trading instruments.
I’m not an all-out Crypto bull but I do allocate a very (Very) small portion of my portfolio to crypto. Enough for me to consider myself part of the game but also comfortable enough for me to live life as usual should it get to $0.
In this article, we’ll explore what’s fuelling this rally and what I think the charts say about Bitcoin in the days ahead.
2 Reasons why Bitcoin is Rising
1. Inflation is coming under control.
Long story short, the price of Bitcoin is often seen as a leading indicator of inflation expectations. This is because when inflation goes up, monetary policy tightens and in general, loans are more expensive, funding is harder to get etc. all of which are factors that work against a high-growth crypto industry in general.
Likewise when inflation becomes more controlled and falls within/below expectations, monetary policy loosens and suddenly, banks are out there giving interest-free loans thus fueling the high0growth cryto industry which in most cases, relies heavily on debt to finance growth.
Reference to the chart below from Trading Eeconomics, we can see that inflation has indeed peaked last year and we are now seeing inflation still happening but at a lower pace than before. Do not be misled to think that is no inflation or even deflation. Prices are still rising every month just that the rate of increase is lower than before.
To illustrate my point a little further, if you look at the above chart, you would think that inflation is “under control” but is it really? Let’s look at another chart that takes into consideration the 12-Month Inflation rates from the US Inflation Calculator
Based on this chart, we can see that while the month-on-month inflation seems controlled, the 12-month inflation actually skyrocketed proving the concept of “transitory inflation” wrong and requiring us to tighten monetary policy.
Back to Bitcoin, for the foreseeable future, the price action of Bitcoin will indeed follow inflation expectations closely and any signs of monetary policy loosening will no doubt have a positive correlation with Bitcoin.
2. Short positions falling
We are by and large seeing more short positions being covered since the start of the year. In most cases, such liquidations often help fuel the rally even more as buy orders are typically triggered. This in addition to the usual buying volume would certainly add additional upward momentum to any trading instrument.
This has also led to many crypto bulls declaring that the “Crypto-winter” is over.
It’s easy to suggest that short positions are covered in line with inflation expectations but if we look at the price of Bitcoin on the yearly chart as shown below, we can see that the lows of Bitcoin in 2023 are indeed in line with the resistance levels from 2018.
By the laws of technical analysis, this is indeed an area where bears would typically want to close their positions as they deem that this is a reasonable area to take profits.
What do the charts say?
1. Golden Cross (Bullish)
At the onset, we can most certainly conclude that we are still in a very strong bull rally in the mid-long term as since forming the golden cross (when the 50 Day Moving Average crosses the 200 Day Moving Average) back in February, Bitcoin continued to accept the 200 Day Moving average as a dynamic support level having rebounded off it in mid-march (Green Circle).
2. Ranging (Neutral)
At present, I am cautiously optimistic about where we are at as we are currently trading within the range of $28,000 and $32,000. Bearing in mind that this was the previous range where Bitcoin failed to hold an interim support level for 2 weeks back at about this time last year (Red Circle). While it’s good to see us trade at the same levels where we were a year ago, traders should be cautious so long as Bitcoin continues to bounce off these levels.
3. Momentum Stagnant (Neutral)
With the Relative Strength Index as my preferred momentum indicator, we can deduce the following,
- Momentum is stagnant in the near term. (Blue Circles) This could suggest that the rally is running out of steam and that there might be room for some retraction in the short-term while traders decide their next move.
- At the same time, we can see that while momentum is muted, prices are still rising in the short term suggesting that traders have accepted these prices at the present.
- While momentum is lacking, prices are holding.
I am indeed bullish on Bitcoin in the mid-long term.
I believe that at one point in time it was severely oversold but has presently reached levels where both bulls and bears are comfortable. It is unlikely that the crypto industry will see any breakthroughs of its own in the days ahead hence it would be up to macroeconomic indicators to pave the way forward for Bitcoin.
