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Bear markets have historically been complex for traders to traverse, and the standard set of "reliable" indicators that define favorable entry positions cannot anticipate the duration of crypto winter.
Bitcoin's (BTC) recent recovery back above the psychologically significant price level of $20,000 indicated to many traders that the bottom had been reached, but a closer dive into the data suggests that the short-term relief rally may not be sufficient evidence of a macro-trend reversal.
A recent analysis from cryptocurrency research firm Delphi Digital provides evidence of the need for prudence, stating that "we need to witness a bit more suffering before we have the conviction that the market bottom has been reached."
Despite the agony already endured since Bitcoin’s price peaked in November, comparing its loss with the 2017 market peak indicates the probability of a more extraordinary collapse shortly.
During past bear markets, Bitcoin’s price plummeted by around 85 percent from its peak to its final trough. According to Delphi Digital, if history were to repeat itself in the current climate, the result would be “a low slightly around $10,000 and another 50 percent drop for current levels.”
During the previous bear market, the price of Ether (ETH) dropped by 95 percent from its high to its bottom. If the same situation occurs this time, the cost of Ether might go as low as $300.
Delphi Digital commented: “The risk of reliving a similar crash is higher than most people are probably discounting, especially if BTC fails to hold support in the $14K–16K range.”
Data reveals that “past significant market bottoms corresponded with severe oversold circumstances” for traders attempting to pinpoint the current market’s trough.
As illustrated in the weekly chart below, Bitcoin’s 14-week relative strength index (RSI) dropped below 30 for the third time in its history, with the previous two instances occurring around market bottoms.
While some may see this as a hint that it is a good time to re-enter the market, Delphi Digital cautioned anyone anticipating a “V-shaped” recovery, stating, “In the prior two instances, BTC traded in a choppy sideways range for several months before finally staging a strong recovery.”
Looking at the 200-week simple moving average (SMA) also raises doubts as to whether the previous support level will continue to hold.
Since March 2020, Bitcoin recently fell below its 200-week SMA for the first time. Historically, the BTC price has only traded below this level for a few weeks during prior bear markets, indicating that a bottom may be near.
Currently, the market is seeking the ultimate surrender that has traditionally signaled the conclusion of a bear market and the beginning of the next cycle.
While market sentiment is currently at its lowest level since the March 2020 COVID-19 crisis, it has not yet reached the depths of despair witnessed in 2018.
According to Delphi Digital: There may be a need for more suffering before emotion reaches its lowest point.
The crypto market’s decline has been evident since the end of 2021, but runaway inflation and increasing interest rates are the underlying reason for the market’s collapse.
Bitcoin and other risk-averse assets are expected to experience more declines, given the Federal Reserve’s intention to maintain its rate-hiking strategy.
The last statistic indicating that a final capitulation event must occur the profit percentage of BTC supply, which reached a low of 40% during past down markets.
According to statistics from Glassnode, this indicator is presently at 54.9 percent, lending validity to the notion that the market might yet undergo a further decline before it reaches its true bottom.
