We had recently written about a likely bottom in bitcoin, however, the pullback was shallow and the cryptocurrency is on the verge of a breakdown once again. While it is difficult to pinpoint an exact bottom, we can estimate the process of a bottom formation.

Key observations

  1. Bitcoin is looking weak and is likely to fall further
  2. The RSI has entered into the oversold territory, which has historically been a good buying opportunity
  3. If the RSI falls below the current levels of 28, it can fall to 25 and 21
  4. We recommend buying bitcoin close to $5,500 to $5,800 levels for the long-term

Markets became frothy in 2017

In 2017, the mood among the various investors, be it stock market or cryptocurrencies was upbeat. Both were on a scintillating run, though the stock market returns paled in comparison to the cryptocurrencies.

Nevertheless, dips proved to be shallow and pullbacks always made new highs. Various analysts projected lofty targets and the media wrote stories about the riches earned by the investors in cryptocurrencies.

This led to a new breed of greedy traders who believed that the stock markets and the cryptocurrencies were never going to correct. This led to reckless investments using borrowed money.

Markets have entered a risk off phase

Experienced traders know that parabolic rallies are unsustainable. Therefore, in 2018, first, the cryptocurrencies entered into a profit booking phase, which later escalated into a full-blown selling by the traders who were stuck with long positions at higher levels.

Similarly, the stock markets, which started the year on a high note, have corrected sharply in the past week, which points to a shift in investor sentiment from risk on to a risk off mode.

We may see one more leg of panic selling

With cryptocurrencies falling, the news of hacking in Japan, the crackdown on anonymous cryptocurrency trading in South Korea, card companies prohibiting cryptocurrency purchase on credit cards are all news that are likely to create more panic.

In this panic, the weaker hands are likely to sell aggressively fearing a complete loss of capital because the media starts to highlight the bearish views of analysts.

What levels can the panic selling drag Bitcoin to?

In our previous article, we had highlighted how the 200-EMA had acted as a strong support for long-term purchases in 2017. We expected the moving average to hold this time also, however, it failed. Now, we want to look at another possible indicator, which is flashing that a likely bottom is around the corner.

In the past three years, there have been seven instances when the declines pushed the RSI into the oversold territory below 30 levels and on all the occasions Bitcoin either bottomed out on the same day or entered into a bottoming process. These panic selling’s resulted in a low, which was a good time to buy for the long-term.

Bitcoin bottoms coinciding with a low on the RSI

SN Date RSI low
01 September 14, 2017 27.2421
02 July 16, 2017 28.4791
03 August 02, 2016 21.0585
04 January 15, 2016 25.747
05 August 18, 2015 21.1003
06 April 15, 2015 29.1537
07 January 17, 2015 25.0161

How low can prices fall from the current levels?

At the current levels, the RSI has already entered into the oversold territory as it is quoting at 28.0556 levels. In the previous instances, we have seen that if the RSI doesn’t bottom out at 28 levels, it then falls to 25 and thereafter to 21 levels.

If bitcoin doesn’t find support close to the major support level of $7,500, which is also the support line of the descending channel, then the next stop on the downside is $5,511 levels. Also, the slide from $7,500 to $5,500 is likely to be a quick one as the longs liquidate in a state of panic. That is likely to sink the RSI further lower towards the levels which have previously resulted in a bottom.

Therefore, we believe that the long-term investors should invest about 40 percent of their desired allocation in the range of $5,500 to $5800.

Will this start a rally in Bitcoin?

Not necessarily.

After such a sharp fall, we are likely to witness a process of bottom formation, which will result in a few volatile days of trading before the cryptocurrency embarks on the next uptrend.

Therefore, this purchase should be undertaken by the long-term investors only who want to own Bitcoin for a few years.

Traders should stay calm and buy on panic dips

Though we all have heard to buy low and sell high, doing it practically is very difficult because you have to go against the herd.

Buying when the sentiment is negative and when there is fear among the traders is not easy. However, history shows that such panics usually result in a good buying opportunity for the long-term traders who purchase and hold their positions.

Recommendation

Bitcoin is likely to decline to the $5,500 to $5m800 levels in the next few days, if the $7,500 level breaks convincingly. That is likely to be a level that is close to the bottom.

Therefore, long-term traders should buy around 40% of their desired allocation at those levels and hold. We already have about 25% of the desired allocation purchased in the range of $8,600 to $8,900. That brings the total buy to 65%.

We shall update on when to buy the remaining position.