This is the Kvarn Pulse newsletter, featuring current events in the cryptocurrency market and macroeconomics.
Week by numbers
Over the last week, crypto market has been moving upwards. The price of the largest cryptocurrency, Bitcoin, rose by about seven percent, while the price of the second-largest cryptocurrency, Ether, fell by about two percent. The total market cap of the rest of the crypto market (excluding the largest stablecoins) rose by about nine percent.
Bitcoin dominance rose by nearly one percent (about half a percentage point) during the week. This was primarily due to the notably weak performance of Ether, the second-largest cryptocurrency.
While the rest of the crypto market rose during the week, Ether’s price not only lagged behind the market average but actually fell. As a result, the ETH/BTC ratio fell by as much as eight percent over the week.
Among the tokens in the Kvarn X trading service, the week’s biggest price gainers were ADA (+45%), BCH (+34%), and HBAR (+26%). Although the overall mood of the week was quite positive, there was significant dispersion within the altcoin market, and there were also some steep price drops, such as MKR (-20%), PEPE (-14%), and LTC (-14%).
Weekly timeframe analysis: Trend reversing?
As the calendar month changes, it is a good time to take a slightly longer view of the crypto market to get an idea of where we might be in the market cycle.
Looking at the weekly timeframe, we can see that over the last week, Bitcoin’s price has fallen below its 20-week moving average.
Crossings above and below the 20-week moving average are often seen as signs that the possibility of trend reversal so should be taken seriously. In this case, it thus provides a reason to consider the possibility that the uptrend which began in late summer might be turning into a downtrend.
Relative Strength Index (RSI) shown in the lower panel of the chart above gives a similar signal. RSI (blue line) fell below its signal line (orange line) in December and has not been able to climb back above the signal line since. This indicates a slowing market momentum. On the other hand, the RSI remaining above 50 still suggests that there has been no unequivocal downward trend yet.
Finally, it should be clarified that the signs of potential weakness in the crypto market now observed are not particularly crypto-specific but rather relate to a more general decline in risk appetite in markets. If we take a look at the S&P 500 stock index with the same indicators as above for Bitcoin, the picture is quite similar.
In recent weeks, like Bitcoin, the S&P 500 index has fallen below its 20-week moving average, which forces us to take seriously the possibility that the market rise that has lasted for two years could be coming to an end.
The Relative Strength Index of the S&P 500 has, like Bitcoin, been below the declining signal line since December, indicating that momentum is fading. Unlike Bitcoin, however, the S&P 500 RSI has already fallen below 50.
This subtle distinction can also be seen on the daily chart, where we can see that while the S&P 500 index is only about two percent higher than it was just before the November U.S. presidential election, Bitcoin’s price is still about thirty percent higher than it was before the presidential election.
Two alternative conclusions can be drawn from this discrepancy. On the one hand, Bitcoin’s price remaining high can be seen as a sign of its relative strength, which could manifest as a strong price increase when the market turns upward again.
On the other hand, the fact that Bitcoin’s price is still relatively high may suggest that there is still considerable room for further downside to if the overall downtrend continues. We do not mean to predict that Bitcoin’s price would be returning to pre-election levels, but at least as a reference point, it is worth remembering that about half a year ago, Bitcoin’s price was in the range of 50,000 to 65,000 dollars, i.e., 30–40% lower than today’s price.
The conclusions we have drawn from the weekly price charts also seem to be supported by examining the market on a daily timeframes. From the chart below, we can see that both the S&P 500 index and Bitcoin’s price turned to an uptrend in August–September (1), which lasted until early December. After that, both turned sideways, forming a fairly tight “range” (2). At the turn of February and March, we have seen both drop out of this range (3). We have also seen both create a new “lower low” (4) below the range, which is often one of the first signs of a downtrend beginning
In summary, based on our examination, both the stock and crypto markets are at least in a correction. The next question of interest is whether this time it is more like
- the correction in autumn 2023, which lasted about ten weeks and brought the S&P 500 index down by about ten percent, or
- the full-scale bear market of 2022, which lasted about ten months and brought the S&P 500 index down by nearly 30 percent.
At this stage, it is still difficult to say which is the case, and we advise keeping an eye out for both scenarios. We believe that the 20-week moving averages will once again provide a reasonably good indication of the downtrend transitioning back to an uptrend. Currently, Bitcoin’s 20-week moving average is around 93,000 dollars, and as long as it remains below that level, continuing the downtrend seems like a justified assumption.
Trading in a downtrend?
Assuming that the downtrend now observed continues, it may be useful for a crypto trader to fine-tune their trading strategies. Typically, the key change is that when trading against the prevailing trend, reaction speed and risk management become more critical. Whereas when trading in the direction of the trend, it is possible to ride the momentum for several weeks or even months, trading against the trend requires being prepared to hold positions for, at most, couple of weeks or even for only a few days.
From the chart below, we can see that even a brutal bear market like that of 2022 offered several opportunities for short-term trading.
The following three tips have often been useful when trading in a downtrend:
1.Price drops in crypto often trigger forced liquidations in leveraged positions on the market, which push prices momentarily lower in an artificial way. These liquidation drops often offer good buying opportunities.
2.In a downtrend, it is often wise to close positions at the very first signs that the “bounce” is ending. Since these bounces themselves are short-term deviations from the prevailing trend, it usually does not pay to see the downturns within them as “dips” in the bounce, but simply as signs that the bounce is ending and trend resuming.
3.Because trading against the trend involves trying to identify short-term deviations in a fundamentally unfavorable trend, it is good to remember that time and longer-term probabilities are generally not on the trader’s side. Thus, all positions should be closed quickly and kept properly sized, so that the possible continuation of the trend does not cause significant losses.
With these thoughts, we leave the reader to follow the crypto market’s intriguing situation, with Bitcoin and the major stock indices currently moving below their 20-week moving averages.
We will return again next week with the Kvarn Pulse newsletter, so stay tuned!
