Technical and Psychological Analysis of the Cryptocurrency Market: Will Bitcoin go to $1,800?

After breaking support at 3.5k, there is now a chance Bitcoin will soon retest a downward target of 3.2k. While bearish momentum is present, shorts may take profit after yesterday’s decline which could lead to a small reaction rally or consolidation period. Although bearish momentum is overwhelming, markets rarely move straight downward to specific targets. Furthermore, there are typically small reaction rallies in the aftermath of extreme sell offs.

If Bitcoin bounces off of support at 3.4k and a tentative retest of 3.5k-3.6k occurs, the bulls will likely be rejected for a few reasons. First, in an overwhelming bear market it is important to trade and analyze with a short term bearish bias. The alternative is true for a bull market. Additionally, overall weekly volume has declined sharply since November. This indicates the bulls currently have little to no macro buying momentum. Ultimately, if the bulls fail to break above 3.5k, this action would create another lower high on the macro trend. Since the beginning of the bear market, Bitcoin has been unable to create a higher high and has followed a pattern of repeated lower highs. For now, it seems Bitcoin will likely continue to follow this pattern in the short run.

If Bitcoin continues to create lower highs with support at the yearly low of 3.1k, price would materialize a situation similar to stage 1 of the bear market. In this article, Stage 1 refers to the time period from January 2018 to November 2018. The reason this time period can be characterized as the 1st stage of the bear market is because Bitcoin held artificial support at 6k for roughly 8 months. Throughout stage 1, Bitcoin tested yearly lows roughly 5-6 times. Each additional time a yearly low is tested, the support level typically becomes weaker and is more likely to break to the downside. This pattern could be dangerous for Bitcoin if price continually retests 3.1k in the coming months.

During stage 1, Bitcoin formed a pattern of lower highs which created a textbook descending triangle formation (A descending triangle formation will break to the downside 70% of the time while an ascending triangle will break to the upside 70% of the time). Eventually, Bitcoin broke support at 6k and dropped further into the abyss.

Now Bitcoin has now formed a temporary bottom at roughly 3.1k. If Bitcoin continues to create lower highs with support at 3.1k, it has the potential to form a second descending triangle formation. If this deadly pattern plays out, there will be a 70% chance Bitcoin will break below yearly lows. This situation would force Bitcoin to drop downward into the 2.2k-3k zone with the next major support level at 1.8k (a 45% decrease).

In the situation described above, it is highly unlikely Bitcoin will decline straight to 3k or 2.2k. Price typically moves in both directions and will bounce around incrementally. While technical analysis is essential to consider when evaluating the market, there have been interesting psychological developments that may provide insight to the ‘feel’ of the market.

Currently, there are mixed psychological signals within the space. One bullish sign occurred when VanEck’s Bitcoin ETF was withdrawn. Many expected a cancellation or rejection of the ETF would lead to a substantial price decline. After all, ETF delays and rejections have historically had a harsh effect on Bitcoin’s price. However, price was barely effected by the ETF decision which may indicate a few things. First, the market did not expect the ETF to be passed in the first place, and second, there may not be as many weak hands left in the market as we thought. Being said, there are behavioral signals which provide pessimistic perspectives of the market as well.

Generally, tribalism has become very toxic in the cryptocurrency space. Some have referred to this as ‘Coinism’, or essentially tribalism in a cryptocurrency community. Individuals become very passionate in the crypto space because they invest their savings and rally behind an ideology. As a result, these people find a sense of community when they are connected with others who share their beliefs. After establishing a community, these people become emotionally attached to their investment to the point in which they block out any legitimate criticism of their investment. Their bias is justified by the herd mentality and any opposing arguments are silenced. While many cryptocurrency communities practice Coinism, the most fascinating case study is the XRP community.

Recently, a reporter for Messari published an article criticizing XRP’s overestimated market cap. Radical members of the XRP community responded by targeting death threats at Ryan Selkis, founder of Messari. In reality, this event does not suggest the entire XRP community consists of malevolent individuals. This event is merely an example of passion and emotional attachment to an investment. An individual who finds comfort and support in a community by buying a financial asset is the opposite of an intelligent investor. The major of successful investors will advocate removing emotion and becoming utterly detached from the asset you are considering buying or selling.

Although this kind of community brings people together with altruistic effects, it is very naive to base it around a financial asset where larger market forces could take advantage of faith-based investing. The same can be said for Bitcoin hodlers and many other crypto communities, but the premise that many of these investors remain in the space suggests that Bitcoin may have to go to 1.8k before a healthy bottom can be established. While momentum is overwhelmingly bearish, markets are irrational and a disbelief rally is always possible.

Disclaimer: I am not a financial advisor. This is not financial advice. Please do your research independently and make objective decisions. This article is intended to educate readers on the recent state of the cryptocurrency market. The author of the article trades cryptocurrency.