Bear markets have historically been challenging to navigate for traders and the conventional set of “reliable” indicators that determine good entry points are unable to predict how long a crypto winter might last.
Bitcoin’s (BTC) recent recovery back above the psychologically important price level of $20,000 was a sign to many traders that the bottom was in, but a deeper dive into the data suggests that the short-term relief rally might not be enough proof of a macro-level trend change.
Evidence pointing to the need for caution was provided in a recent report by cryptocurrency research firm Delphi Digital, which suggested that “we need to see a little more pain before we have conviction that a market bottom is in.”
Despite the pain that has already been felt since Bitcoin’s price topped in November, a comparison between its pullback since then and the 2017 market top points to the possibility of further decline in the short-term.
BTC/USD price normalized since all-time high (Current vs. 2017 peak) source: Delphi Digital
During previous bear markets, the price of BTC fell by roughly 85% from its top to the eventual bottom. According to Delphi Digital, if history were to repeat itself in the current environment it would translate into “a low just above $10,000 and another 50% drawdown for current levels.”
The outlook for Ether (ETH) is even more dire as the previous bear market saw its price decline by 95% from peak to trough. Should that same scenario play out this time around, the price of Ether could drop as low as $300.
ETH/USD price percent drawdown (current vs. prior ATH). Source: Delphi Digital
Delphi Digital said,
“The risk of reliving a similar crash is higher than most people are probably discounting, especially if BTC fails to hold support in the $14-16K range.”
Oversold conditions prevail
For traders looking for where the bottom is in the current market, data shows that “previous major market bottoms coincided with extreme oversold conditions.”
As shown in the weekly chart below, BTC’s 14-week RSI recently fell below 30 for the third time in its history, with the two previous occurrences coming near a market bottom.
BTC/USD weekly price vs. 14-week RSI. Source: Delphi Digital
While some may take this as a sign that now is a good time to reenter the market, Delphi Digital offered a word of caution for those expecting a “V-shaped” recovery, noting that “In the prior two instances, BTC traded in a choppy sideways range for several months before finally staging a strong recovery.”
A view of the 200-week simple moving average (SMA) also raises question on whether the historical support level will hold again.
BTC/USD price vs. 200-week SMA and 14-week RSI. Source: Delphi Digital
Bitcoin recently broke below its 200-week SMA for the first time since March 2020. Historically speaking, BTC price has only traded below this level for a few weeks during the previous bear markets, which points to the possibility that a bottom could soon be found.
The final capitualation
What the market is really looking for right now is the final capitulation that has historically marked the end of a bear market and the start of the next cycle.
While the sentiment in the market is now at its lowest point since the Covid crash of March 2020, it hasn’t quite reached the depths of despair that were seen in 2018.
According to Delphi Digital:
“We may need to see a bit more pain before sentiment really bottoms out.”
Crypto Fear & Greed Index. Source: Alternative
The weakness in the crypto market has been apparent since the end of 2021, but the real driving force behind the market crumbling include run-away inflation and rising interest rates.
BTC/USD vs. Fed funds rate vs. Fed balance sheet. Source: Delphi Digital
Rising interest rates tend to be followed by market corrections, and given that the Federal Reserve intends to stay the course of hiking rates, Bitcoin and other risk-off assets are likely to correct further.
One final metric that can suggests that a final capitulation event needs to occur is the percentage of BTC supply in profit, which hit a low of 40% during previous bear markets.
BTC/USD price vs. percentage of supply in profit. Source: Delphi Digital
This metric is currently at 54.9% according to data from Glassnode, which adds credence to the perspective that the market could still experience another leg down before the real bottom is in.
The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, you should conduct your own research when making a decision.