Conviction Around a Sub-$20,000 Bitcoin Price Keeps Growing
The billionaire investor Ray Dalio recently made waves when he pronounced that “cash was still trash” while conceding that he owns a little exposure to Bitcoin. Even though the co-founder of the Bridgewater hedge fund – which is still up over 1.4 percent this year even as the broader S&P 500 index is down nearly 20 percent – does not believe that ARK Invest’s Cathie Wood is right in calling for a 10x increase in the price of Bitcoin, the billionaire still believes that the world’s largest cryptocurrency retains utility in the greater scheme of things. Consequently, Dalio continues to urge investors to allocate around 2 percent of their savings to Bitcoin, given its function as the digital version of metallic gold.
Against this backdrop, it is quite pertinent to place Bitcoin’s ongoing weakness in the proper context.
Evidence for a Sub-$20,000 Bitcoin Price Keeps Growing
Last week, we had noted that the world’s premier cryptocurrency was nearing a crucial support level against the price of gold. Given Bitcoin’s digital gold credentials, many analysts accord outsized importance to the cryptocurrency’s price dynamics relative to its metallic counterpart.
If you zoom in, you can see that the crucial support level at 16.15 has now been breached, with the most recent candle managing to close at 16.01. However, we would still wait for a more decisive breach to materialize in the next few days. As we established last week, this support level is quite important given the dearth of any material intervening support levels until the 9 - 11 ratio levels. If Bitcoin subsequently goes on to hit a ratio of 9.0 relative to the price of gold, it would correspond to a BTC price of around $16,000, based on the current gold price of $1,857.
The above chart details key technical levels to watch for Bitcoin. Here again, readers can see that the price of the world’s largest cryptocurrency is perched on a critical support zone. Any decisive breach from here onward will see Bitcoin test its 200-week moving average (MA) relatively quickly. This MA (indicated in purple above) is extremely important, given that Bitcoin has historically bottomed out after touching it.
Historically, #BTC tends to bottom at or below the 200-MA (orange)
The 200-MA thus tends to offer opportunities with outsized ROI for $BTC investors (green)
Wicks below it are the point of peak opportunity
So how much does BTC wick below the 200-MA?
— Rekt Capital (@rektcapital) May 24, 2022
As explained by @rektcapital, Bitcoin tends to penetrate the 200-week MA by between 14 percent and 28 percent before bottoming out and resuming its upward trend. The 200-week MA is currently located at $21,962. If we assume a max penetration of 28 percent beyond this level, it will equate to the cryptocurrency bottoming out at $15,812.64.
Historically, #BTC tends to perform downside wicks below the 200-MA
These $BTC downside wicks represent peak financial opportunity for long-term investors
— Rekt Capital (@rektcapital) May 24, 2022
Last week, we had also pointed out that Bitcoin usually falls around 80 percent relative to its all-time high in bearish cycles. This relationship held during the last three bearish phases, and there is a hefty probability that the current phase of weakness might also entail similar losses. A correction of 80 percent from Bitcoin’s all-time high would translate to a price of around $13,000.
All of these indicators point toward a sub-$20,000 price for Bitcoin. Yet, there is more evidence for further weakness. Morgan Stanley’s Michael Wilson now sees the S&P 500 index bottoming out at around the $3,400 price level, equating to a further downside of around 13.7 percent from its current price of $3,941. Given Bitcoin’s prevailing correlation (as measured by Coin Metrics) of 0.69 relative to the S&P 500 index, indicating that around 69 percent of the moves in the cryptocurrency follow those of the benchmark index, Bitcoin’s price will have to tumble by at least 9.4 percent from the current level to maintain this correlation regime, thereby equating to a price of at least $26,000. Readers should note that Bitcoin’s volatility is much greater than that of the S&P 500 index. Consequently, if the benchmark index falls a further 13.7 percent, it would result in a carnage in Bitcoin’s price that would likely be much steeper, strengthening our conviction in a sub-$20,000 BTC price.
Bringing It All Together
Bitcoin is currently in oversold territory, as computed by Look into Bitcoin’s Reserve Risk, which measures the confidence of the long-term Bitcoin holders relative to the cryptocurrency’s current price.
Consequently, we would not be surprised if Bitcoin were to witness a relatively mild short-term bounce. However, in light of the factors detailed above, we can predict fairly confidently that the path of least resistance for the world’s largest cryptocurrency currently remains in favor of bears.
Do you think Bitcoin will be able to recover if its price falls below the $20,000 level? Let us know your thoughts in the comments section below.