13 February 2020 | HYCM – Many traders are becoming excited at the prospect of another cryptocurrency bull market. The last one officially ended at the close of 2018 when bitcoin topped-out just shy of $20,000. This was followed by a sustained downturn that would see the world’s first and largest cryptocurrency dropping to just over $6000 by November of the following year.
Bitcoin price movement
The price had tested, held and re-tested this $6000 support level throughout the latter half of 2018. This led many BTC traders to suppose that the bottom was in.
In mid-November the price plunged through this level, falling all the way down to $3000 over the following month. The low of December 2018 has thus far proven to be the bottom. This means that from peak to trough the price fell by over 80%.
2019 started auspiciously, with an initial pop to over $4000 followed by a great deal of speculation that the next bull run was upon us. The buying quickly accelerated, sending bitcoin’s price up to $14,000 by June. However, this price level proved to be just another lower-high and the price fell back, halving again to set a higher-low at around $7000 by year-end.
Bitcoin price rallied in January 2020. The bulls recently tested and reclaimed that all-important $10,000 psychological level. So, what’s going on here?
Bitcoin’s 20-week moving average
Much of what I’ve just stated could have been expressed clearly with the use of a simple moving average. Looking back at bitcoin’s historical price action, we can see that the position of the price is in relation to the 20-week moving average.
This is a highly reliable indicator of what type of market we find ourselves in. When bitcoin is in a bull phase it tends to remain above this 20-week moving average. It comes down to test it as support during periods of consolidation, before gathering momentum and moving back up to set new highs.
When bitcoin’s price closes below this 20-week moving average, it’s an indication that a new bear cycle is upon us. If it stays below the 20-week for more than a couple of weeks, bitcoin’s price will reliably begin to test this 20-week moving average as resistance, bumping up against it as it sets lower-high after lower-high on its way back down. This pattern has held true for about as long as we have bitcoin price data.
Why is this important now? Because in mid-January bitcoin closed above the 20-week moving average for the first time since September of 2019. It tested it in the first week of the month only to be rejected, then broke above it the following week.
So far this year, we’ve had four weekly candles closing above this 20-week moving average. Whether traders have explicitly noticed this pattern or not, it’s a technical reflection of the shift in sentiment that the crypto market has been experiencing of late.
What about the altcoins?
A lot of people have been wondering about altcoins lately. They’ve been watching many of them run with little to no fundamental difference to justify the bullish price action. Although it may seem counter-intuitive at first, the movement of these altcoins is also related to where bitcoin finds itself in relation to that aforementioned 20-week moving average.
Bitcoin’s relationship to the rest of the crypto market can be expressed as follows:
- Bitcoin leads the crypto market; it’s the oldest, largest and best-known cryptocurrency project.
- When bitcoin is in a bull market, smaller-cap altcoins - which tend to be more volatile than bitcoin - also behave bullishly. When bitcoin is in a bear market they generally behave bearishly.
- Before a clear bull or bear trend is established, altcoins react in anticipation of any sign that a bull or bear confirmation may be imminent; the 20-week bitcoin moving average is one such indicator.
Related: Bitcoin Price Forms Golden Cross: Huge Price Move Imminent?
We’ve been witnessing this play out in the broader cryptocurrency market since the beginning of the year. Initially, the broader market experienced lots of buy action in expectation of bitcoin crossing its 20-week moving average from below. Once this was confirmed further up moves were seen in many altcoins.
What crypto commentators often refer to as altcoin season is usually characterized by periods of bitcoin price stability while the rest of the market rallies. Bitcoin breaks through a key level (in this case both the 20-week MA and that important $10,000 level) and consolidates for a period at these new highs, allowing the rest of the crypto market to run.
This may be happening for several reasons. Bitcoin profits may have been diversified into other crypto projects, traders could be taking advantage of this well-established pattern, and those on the sidelines wishing to invest in other crypto assets could be taking bitcoin’s rise and stability above these key levels as a sign that the altcoin bottom is in and that now is a good time to invest.
How does this help you?
Aside from providing you with some background on what this new wave of volatility could be related to, knowing the above also provides you with very clear levels to be monitoring. And since these levels are clearest on the weekly chart, it hopefully provides some context that will prevent you from chasing price moves on the shorter-term time frames.
If we subscribe to the idea that the 20-week moving average has been historically important, then we also know that eventually, bitcoin will come back down to test it as support. Anyone employing a longer-term buying strategy should be aware of this fact. Knowing this may be a good dip-buying opportunity when it does.
Even shorter-term traders should be monitoring this longer-term support and resistance level. The reason is that it appears to be a more solid indicator than anything at the daily, 4-hour and other shorter time frames. Understanding this relationship will help you avoid making mistakes. For example, you won't be either confirming or contradicting the signals you may be receiving at the shorter durations.
All eyes on Bitcoin
For now, bitcoin’s price is staying above the 20-week moving average and is also trading above $10,000. This is bullish, but you must keep in mind that the entire market still looks to bitcoin as the bellwether of all crypto health. So no matter how well your chosen altcoins may be performing, should the tide change and bitcoin fails to hold that 20-week MA as support, you could easily get stuck in a losing trade that falls further, percentage-wise, than bitcoin itself.
Until we see any clear evidence that this dynamic has changed, we still must expect certain alts to outperform when bitcoin is bullish and then to drastically underperform when bitcoin is bearish. For the moment, things are certainly looking good. 2020 is shaping up to be an interesting year for crypto investors.
Lastly, for many, the question remains, do I buy alts at these new elevated prices? Should I wait for them to come back down? What if they never do?
I’m afraid this is always the catch-22 that speculators find themselves in. The default trading wisdom is that, no, you do not chase prices up, but instead, you buy on consolidation. However, it also pays to remember that crypto is a world unto itself. Thus, many a savvy trader has missed out in crypto by doing the smart thing. It’s just the way it goes; this is something you simply have to decide for yourselves.
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