After a substantial lift in crypto, it begs the question, was that the bottom?
The answer, of course, is no idea.
Because bottoms are not events but rather a process.
After a challenging crypto winter, the relief is welcome, but the question of whether it’s over requires some evidence.
This lift might be what is known as a bear trap.
Bear traps entice buyers before heading back down.
On the other hand, it might be the beginning of a new trading range for bitcoin and ether.
So let’s have a look at some things that might tell us about where we are and how to use what we discover.
Be careful picking market tops and bottoms
When I think of market bottoms, I’m always reminded of a quote attributed to Jesse Livermore, In Reminiscences of a Stock Operator. He says:
“One of the most helpful things anyone can learn is to give up trying to catch the last eighth —or the first. These two are the most expensive eighths in the world. They have cost stock traders in aggregate enough millions of dollars to build a concrete highway across the continent.”
The book was published in 1923 when millions were real money.
And while this was said about stocks, where the spreads were in eighths, the same principle applies to picking tops and bottoms in crypto assets.
So on the upside, this means picking tops, getting on the short side too early and getting squeezed.
On the downside, it means catching falling knives trying to pick the bottom.
In both cases, the financial impact is clear. But there is the psychological component as well. And this can present a bigger problem in some ways.
Now, when we look at the bottoming process, there are usually a series of signs we can point to that give us a signal. And these are only signals.
Because market bottoms are only known for sure using hindsight.
The end of the downtrend has a variety of components to it. These are narratives and price action.
And sometimes, you can look at the activity in one asset relative to another for evidence.
Everyone has their favorite signals in the traditional market
In the traditional markets, there are a series of things people point to for clues. And keep in mind that every trader, analyst, and PM has their favorite signals.
In this cycle, attention is laser-focused at inflation related data and interest rates. There will be an increased focus on earnings trends post layoffs. Remember that companies like to package up all their “garbage,” AKA bad news, and drop it off in a single quarter if possible. And this often marks the bottom, but not always.
Sentiment will be reflected in part by the bias of newsletter writers.
And if you’re a Zero Hedge fan, they’ll probably be looking to throw some shade at every Dennis Gartman call. And these days, they join Twitter commentators fading Cramer calls.
The press will post stories on the cover of their magazines and newspapers. And they are almost always wrong.
But the response to bad news becomes important to watch. Any negative news that doesn’t generate downside should be examined.
Others will be watching commodities, bond yields, and action in other markets around the world.
Crypto, by comparison, is less complex but has its own version of some of these.
A sentiment of voices
Sentiment is an interpretation of the bullish or bearish lean of various participants.
Crypto has an enormous range of voices coming from a wide variety of content. And Twitter is a great place to get a gauge of sentiment. Here is where you can take a wide view of the voices around the space.
One of the signs of a bottom is usually the attitude of the long-term believers. They are so beat up they don’t care anymore, which might be considered a sign of a bottom.
This is when their commentary is characterized by the inability to see the change taking place. This is to say that once you’ve been conditioned that every lift gets smoked, you become a bit like Pavlov’s dog. You start to expect it and act accordingly.
This isn’t unique to crypto.
In terms of major players on Twitter, the enthusiasm hasn’t disappeared, but they are much less prominent than they used to be. Their public pronouncements are quieter and less frequent. The haters dominate with a drumbeat of rational arguments against anything that looks vulnerable. You’ll even notice that Saylor’s influence appears to have gone from Great Dane to Chihuahua.
So not exactly given up. But as a signal, this is pretty good.
The reaction to bad news matters
Another sign of a bottom is the reaction to bad news. This is a lot like traditional markets.
On the way to the bottom, every bit of negative news results in selling. The bias eventually becomes sell any story or rumor.
We saw the last batch of selling occur with the FTX debacle.
But since then, selling has been rather muted.
At the bottom, negative news has little or no impact. Sellers no longer care. Lots of the sell side overhang is eaten up. And the response to news starts to change.
Near the bottom, negative news goes from bearish to bullish.
There is still lots of negative news in the space.
At least, that’s where the press is focused.
But even with the recent bankruptcy announcement of Gemini, the sellers in bitcoin didn’t roll in. It’s old news.
The buyers showed up instead. That’s a good sign as well.
Countercyclical investment is a signal
Investment in the space also follows the bullish or bearish trend.
Where investment should technically be countercyclical, meaning it should be highest in weakness and weakest at maximum market strength, it’s often the opposite.
Some of the fattest rounds in crypto took place months before the various big blowups happened.
So investment follows the market, and as the market tails off, so does investment.
Having said that, as crypto winter seems to be at its gloomiest, crypto projects continue to gather investment rounds.
You can’t look through the news in January 2023 without seeing numerous investments being announced.
Banks are still investing heavily in getting up to date in crypto. Or at least that’s what they are projecting in the press. And the big investment players that specialize in risk are quietly sniffing around for underpriced crypto assets to pick up for the next cycle.
And remember, the old pros from the traditional markets, the guys that have been around a few cycles, they don’t think the same way that regular people do. When they signal an interest, you should at least pay attention.
While a lot of money follows the market, these investment rounds and the flow during negative news shows you that the space still has interest.
Trading volumes can matter
Another thing to look at is the volumes on the lift.
In down markets, there is a lot of overhang pushing the market down.
Overhang represents sellers. Sellers can be orders coming into the market on the sell side. Or the selling can be from holders that got caught in the decline that are waiting to get back to even so they can sell without booking a loss.
Eventually, sell orders get walked down and cleared. And sellers either capitulate or pull their orders.
Short sellers will be vulnerable as the overhang disappears.
The first big lift will therefore be quick and aggressive and likely on modest volume.
The reason is that the overhang has been digested.
Then the price will move to the next area where sellers are waiting.
From this vantage point, the bottom still looks a bit like it’s playing out.
Leverage is low at the bottom
Then you can look at leverage.
In a bullish market, leverage is plentiful, and there is significant demand for it.
The leverage picture also includes the cost of capital and exchange risk management protocols.
The demand for leverage will be low at the bottom and will have limited availability.
Risk parameters at exchanges will also be relatively tight at the bottom. So even if you want leverage, and are fine with the cost of capital, the amount of leverage available and the margin required is likely quite a bit higher.
Less leverage will mean less risk of downside liquidations.
Less leverage and tighter risk management, as well as expanded margin requirements, are all signs that the risk is to the upside rather than the downside.
Bitcoin and the DXY
Another interesting signal is the ongoing relationship between bitcoin and the DXY.
You will recall that the DXY is the US dollar index. The dollar index is the relative value of the US dollar against a basket of other fiat currencies. These are the Euro, Japanese yen, British pound, Canadian dollar, Swedish krona, and Swiss franc.
The DXY peaked around 1.14 in the fall of 2022 and has been in decline back towards 1.01 recently.
Bitcoin, in particular, seems to be trading in a loose inverse relationship relative to the DXY.
And keep in mind that the trading level of the DXY at this point will indicate perceptions of interest rate policy between the Fed and the other components of the basket.
A falling DXY might be perceived as bullish for risk-on assets like bitcoin, ether, and the rest of the crypto space.
This one will take time to play out, but so far, this looks like the top in the DXY might be in.
Is it a bottom for bitcoin and crypto?
Crypto remains relatively young. And some signals used in other markets aren’t always applicable here.
Although, Cramer’s call for a drop to $8000 in bitcoin is interesting. He has a near-perfect record for being wrong lately. So there is that.
But one thing to keep in mind about the question of whether the bottom is here or not.
You won’t know for sure until it’s long gone.
And there is the potential for a retest of previous lows. A retracement is always a possibility.
Now, I’m not going to tell you what to do when that happens because, as you know, this isn’t trading advice. However, if you’re cashed up and ready, and all the signals are suggesting a temporary dislocation, you know what to do, right?
Remember Jesse Livermore. Many fortunes have been lost picking tops and bottoms.
There are lots of potential catalysts ahead that can reveal a gathering storm.
So focus on the big picture. The investment is still rolling in. The sector is still attracting talent in a tight talent market.
And the world is still in search of solutions for the future.
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