Bitcoin bulls should brace for aggressive downside market corrections in the sessions ahead, especially as the benchmark cryptocurrency breaks below a critical support level.
Dubbed the 20-week exponential moving average (EMA), the wave has historically served as a primary downside target for bulls to accumulate Bitcoin (BTC). For instance, the BTC/USD exchange rate maintained its bullish bias all across 2020 while trading above the 20-week EMA wave. It eventually closed the year up more than 400%.
Similarly, the 20-week EMA wave supported massive bullish rallies in the April–June 2019 session. Meanwhile, the price floor overstayed its welcome in the 2015–2017 session as Bitcoin surged from $250 to $20,000.
Conversely, slipping below the 20-week EMA wave brought havoc to the Bitcoin market. For instance, the January–December 2018 session logged a 72% decline after the BTC/USD rate slipped below the 20-week EMA. It repeated the same pattern in the September 2019–March 2020 trading session; the pair fell by around 60% after breaking below said wave support.
Negative fundamentals also fueled sell-offs in 2018, 2019 and 2020. In 2018, traders offloaded their Bitcoin positions under the influence of initial coin offering scams. Meanwhile, in 2019, worries over Facebook's Libra token launch, coupled with the Bitcoin Cash (BCH) hard fork and its potential impact on the Bitcoin network, pulled prices lower.
In 2020, the coronavirus pandemic prompted a global market crash. In February, Bitcoin, which was sitting atop attractive rebound profits, became an ideal scapegoat for investors to withdraw their profits to cover their losses in other traditional markets.
The bearish case at present
Bitcoin's break below the 20-week EMA support this week appeared out of a flurry of panic-inducing events. First, Elon Musk, who had invested $1.5 billion in Bitcoin via his electric vehicle firm Tesla, reversed his decision to accept the cryptocurrency as payment, citing environmental concerns.
The "emotional billionaire," as described by Anthony Pompliano, doubled his attack on Bitcoin over the weekend after raising alarms that he would unload his $1.5 billion investment in the cryptocurrency.
That thoroughly coincided with a breakdown in Bitcoin's price. First, it fell from $55,000 to $50,000, then to nearly $42,000.
The 20-week EMA during the price-decline period was near the $46,000 level. This week, BTC/USD crashed to a new sessional low of $30,000 on Coinbase.
The technical fractals alone suggest that Bitcoin's price eyes an extended downside correction toward its 50-week simple moving average (SMA) (the blue wave in the chart above). Part of the reason is the cryptocurrency's tendency to test the 20-week EMA wave for pullbacks.
The "Fractal 2" box in the chart above shows the same: Bitcoin maintained support above the blue wave before crashing below it in the wake of pandemic FUD — fear, uncertainty and doubt. The "Fractal 1" box also shows the same.
Meanwhile, when even the 50-week SMA did not hold up strong against bears, the prices crashed toward the 200-week SMA. At present, the 200-week SMA sits near $12,800.
"If we see the low $30,000s soon, it will then be a question of will we see $10,000–$20,000," noted Clem Chambers, chief executive of financial research outlet ADVFN.
"To me, that’s possible because when the ‘I bought at the top’ brigade stampedes for the exit, it will get extremely spicy," he added.
Some bullish hopes for Bitcoin
Higher inflation remains one of the core bullish catalysts behind the yearlong Bitcoin price rally. It has soared by more than 300% in the previous 12 months, despite the recent downside correction, taking cues from the Federal Reserve's aggressive quantitative easing policy that has lifted investment appeal off traditional safe-havens, including government bonds and the U.S. dollar.
Bitcoin bulls present it as a provably scarce asset, citing its limited supply cap of 21 million coins. That has prompted veteran investors such as Stan Druckenmiller, Paul Tudor Jones, and Mike Novogratz to gain exposure in the cryptocurrency market.
Meanwhile, corporate houses other than Tesla, which include Square and MicroStrategy, have added Bitcoin to their balance sheets as a measure against inflation. Institutional banking systems such as JPMorgan Chase, Goldman Sachs and Morgan Stanley have also announced Bitcoin-enabled investment services for their wealthy clients, pointing that they would be preparing for a spike in demand from mainstream investors.
Novogratz reminded people on Tuesday that Bitcoin is still trading about 32% higher on a year-to-date timeframe, telling CNBC that sometimes markets get ahead of themselves and correct lower to neutralize the overall sentiment. He added:
"Crypto and blockchain are still being adopted by institutions and retail traders alike, so there is no reason to worry."
"We are seeing more and more institutions," says @Novogratz. "I just see an inexorable move from financial institutions and tech companies into the #crypto space. Will it all be #bitcoin or #ethereum? I think #bitcoin will preserve its lane as a stored value." pic.twitter.com/f2yJkfwTFZ
— Squawk Box (@SquawkCNBC) May 19, 2021
On Tuesday, Cathie Wood's Ark Invest increased its crypto exposure by scooping up 118,214 shares of Coinbase, a United States-based cryptocurrency exchange, in a major portfolio reshuffle.