Bitcoin Is Now Primed for a Bounce Even Though the Federal Reserve-induced Equity Market Carnage Continues To Act as a Potent Overhang
Bitcoin (BTC), as the world’s leading cryptocurrency, continues to suffer from its soaring correlation with US equities at a time when the Federal Reserve is bent on hammering risk assets to curb the wealth effect pervading the US economy, thereby hoping to subdue consumer spending and cool down the current red-hot inflationary impulse.
As a refresher, the Federal Reserve had chosen to hike its benchmark rate by 50 basis points (bps) this Wednesday, unleashing a torrid cross-asset rally as investors breathed a sigh of relief on avoiding a 75-bps hike. However, the rally perversely resulted in the monetization of downside hedges, leaving the market vulnerable to downsides pressures. That lower leg came on Thursday when the market suffered its biggest loss since 2020. Given the fact that Bitcoin’s 60-day correlation with the S&P 500 index now exceeds 0.6, reaching a new all-time high in the process, a decisive lower leg was almost a certainty. Bear in mind that the current correlation reading indicates that over 60 percent of Bitcoin's moves are explained by corresponding moves of the S&P 500 index.
Technical Analysis Suggests Bitcoin is Primed for a Bounce, and On-chain Metrics Concur
The chart above highlights pivotal price levels to watch for Bitcoin. As is evident, the cryptocurrency’s price is currently perched at the cusp of a major support zone. Moreover, another support zone lurks just beneath the current one. This means that the broader support area extends all the way to the $29,000 price level.
If these support zones hold, Bitcoin can continue its consolidation pattern, building ammunition for an eventual upthrust. For an upward trend to hold, the cryptocurrency needs to breach its medium-term downward trendline (indicated in red) as well as decisively cross the major resistance located at around the $45,000 price level (indicated in purple).
Moving ahead, Bitcoin’s exchange-based and on-chain metrics suggest that a bounce is in order, boosting the probability of the support zones described above continuing to hold.
For instance, on the 05th of May, Bitcoin experienced the highest liquidation of long positions since the 07th of February. Elevated liquidations are often a sign of capitulation, which paves the way for a sustainable upward ramp.
This observation is supported by the fact that Bitcoin balances held on exchanges have decisively increased in recent days. As a refresher, exchange-held Bitcoin balance is an early indicator of liquidations, as cryptocurrency balances on exchanges are more likely to be liquidated as compared to those held in cold storage.
Moving to on-chain metrics, a reading of Bitcoin’s active address sentiment indicates that a bounce is now in order. This measure compares the 28-day change in the price of Bitcoin with an equal-period change in active addresses. The current reading suggests that the short-term sentiment has now entered oversold territory.
Reserve Risk measures the confidence of long-term holders of Bitcoin relative to the current price of the cryptocurrency. The current reading has now entered support levels bounded in green. This suggests that long-term holders have greater confidence in Bitcoin’s outperformance relative to the current price level.
In our previous post on this topic, we had predicted that Bitcoin was likely to test the $37,000 price zone. That prediction has now panned out. We are now actively looking for a sizable bounce in the cryptocurrency’s price. However, due to the prevailing high-correlation regime between Bitcoin and US equities, a retest of the $29,000 price zone followed by a subsequent sizable rally remains a viable possibility.