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My Take On the Recent BitCoin Volatility

Everyone and their dog is wondering what is happening to the crypto-currency markets and what the future has in store for Bitcoin in particular. So here are my thoughts, keeping in mind I don't actively trade Bitcoin and I don't have a firm grasp of the blockchain technology.

BitCoin Sentiment Indicators

The first thing I did, to try and understand what is going on with Bitcoin, was to understand whether there are any sentiment indicators at all that can help gauge Bitcoin positioning and market pulse. Here is what I found.

1. Gold/BitCoin Ratio: the Gold/Bitcoin ratio has appeared in various institutional commentaries, because it's the battle between physical Gold and electronic Gold. Both instruments are seen as a hedge against inflation and against government instability. So, technically speaking, I see a recent rotation back into physical Gold with a volatility expansion. Current resistance is around the Jan 2021 highs, and then the Christmas 2020 gap area. Based on last week's close and the daily performance, it appears markets are poised for another shot at the recent spike high.

2. Active Address Indicator

Active Addresses are a signal of money flowing in or out of BitCoin. LookintoBitcoin created a useful sentiment indicator based on active addresses.

Here's how to read it:

  • Grey lines on the chart show the change in active addresses.

  • On the outer boundaries of those grey lines are standard deviation bands.

  • Dotted red line = upper boundary

  • Dotted green line = lower boundary

  • Orange line is the 28 day price change (%).

  • When the orange line reaches the upper boundary (red dotted line) it is indicating that short term market sentiment is overheated. Because the rate of increase in price is outstripping the rate of increase in active addresses.

  • The opposite is true when the 28 day price change hits the lower boundary (green dotted line). Here market sentiment is overly bearish and we often see $BTC price then increasing thereafter.

We are currently experiencing extended bearish sentiment, which is what you would expect after such a decline. A bounce is possible/probable based on this indicator.

3. BitCoin Whales (ie. wallet sizes > 1000 BTC)

While not always strongly correlated with price action, it is still relevant to analyse whether big money is flowing into BitCoin or out of Bitcoin. While the Active Address Indicator shows all active addresses, independently from the size, here we're just looking at big players.

It would seem that Bitcoin has experienced one of the largest outflows of bit money in a while...and these players all watch the same things to help them gauge sentiment:

  • believability/reputation in the institutional world (for example, Elon Musk tweets and beliefs, MicroSystem communiques, etc.)

  • political/regulatory risks (like the recent hit from China regulators, and talks of regulation even in the USA)

  • probable future yield (because ALL financial instruments compete with one another).

4. Non Realised P&L

I like this indicator because it shows structural extremes: when too many people are making money in BitCoin, there is no further incentive to buy, and price must naturally deflate to attract more buyers. Vice-versa, when price drops and most people are losing money on Bitcoin, it becomes attractive to purchase some more.

Currently, we are neither in capitulation territory (which would indicate a bottom) nor are we near euphoria. This indicator suggests BitCoin could go either way...or rather: it could decline further before buying becomes much more attractive.

5. Elon Musk Tweets

Elon Musk has recently become the "must follow" twitter account if you're ae crypto trader, because his tweets have single-handedly changed the market type on Bitcoin. His most recent tweets talk about Bitcoin not being environmentally friendly, and that "green crypto" might become a stronger force.

Main takeaway: follow Musk the way currency traders follow FED's Powell!

Technically Speaking

To sum up the sentiment indications, it seems that Bitcoin has more space to fall, because:

  • big money has been rotating into Gold;

  • big money has been exiting BitCoin;

  • Musk has pulled support away from BitCoin;

  • Non Realised P&L is far from being extended.

Technically speaking, the main test will be the retest of the spike low from last week around 30770.

A close below 30770 would seriously impact the whole BitCoin uptick. For now, momentum remains to the downside with yesterday's bearish engulfing.

Only a close back above 45030 would suggest bulls are back in control.

Over to You

How do you analyse BitCoin? What sentiment indicators do you use, to understand what's going on beneath the price chart? What is your bet on the coming days/weeks in Bitcoin?

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