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Beware the Bitcoin Rally: Short Squeeze and Excitement Not Enough for Bull Cycle

Published October 25, 2023 1:33 PM
Nikola Lazic
Published October 25, 2023 1:33 PM

Key Takeaways

  • Bitcoin jumped by 125% from its November 21 low.
  • BTC has a short-term potential for further gains below $40,000.
  • On-chain figures don’t suggest a high demand.
  • A larger descending move could soon occur.

Contrary to widespread predictions, Bitcoin surprised the market on Monday, October 23, surging to $35,200, marking a remarkable 33% increase from its October 12 low of $26,570.

This unexpected surge set off a chain reaction in the cryptocurrency market, driving altcoins like LINK, AAVE, BSV, and INJ to even more impressive gains from their October lows. Our recent analysis of Bitcoin explored potential catalysts for this surge.

While undeniable fundamental factors are at play, such as mounting anticipation of a Bitcoin ETF and hint at its imminent reality, the true drivers behind these price spikes seem to be two short-squeeze events.

It’s essential to grasp the dynamics of altcoin valuations. Their USD values are primarily linked to their BTC equivalents since most altcoins are primarily traded against BTC and ETH on exchanges. This means that even though it may seem like all altcoins are surging, their USD values essentially rise in sync with Bitcoin’s ascent.

In light of this context – a short-squeeze indicating predominantly bearish market sentiment and the altcoin rally largely mirroring Bitcoin’s price movement – it prompts the question: How reliable is this rally?

Bitcoin On-chain data 

When assessing the on-chain demand for Bitcoin, it’s crucial to take into account the quantity of Bitcoin held on exchanges, as this can offer valuable insights into accumulation patterns.

On-Chain Demand Analysis:

The chart illustrating Bitcoin holdings on exchanges has displayed a consistent downtrend since its peak in June, persisting throughout the year. Nonetheless, when viewed alongside recent developments and past occasions when Bitcoin’s price surged, the decrease in supply seems relatively modest.

No signs of major accumulation
No signs of major accumulation

Starting from October 13, when the amount of Bitcoin on exchanges peaked at 2,056,000, it gradually decreased to 2,018,000 by October 19, indicating a relatively minor decline of just 38,000 BTC.

Notably, this decrease preceded the recent price surge. Interestingly, as the price began its ascent, the number of Bitcoins on exchanges began to rise once more. This trend implies that investors might be transferring their Bitcoin to exchanges, possibly with the intent to capitalize on the rising prices and secure their profits.

The growing deposits may indicate a willingness among some investors to sell, particularly if they anticipate a potential price correction following the parabolic increase.

Supply Side Analysis – Miners

Shifting our focus to the supply side, miners hold a central role. The Miner Position Index (MPI) offers valuable insights into their actions. Elevated MPI values signal substantial Bitcoin deposits by miners on exchanges, often signaling a potential intention to sell. By analyzing the MPI, we can assess whether miners aim to take advantage of current price levels or are maintaining their Bitcoin, anticipating further price appreciation.

Miners putting pressure
Miners putting pressure

In conclusion, while on-chain metrics offer valuable insights into market behavior, it’s essential to consider them alongside other indicators and the broader market sentiment to gain a comprehensive understanding of potential price movements.

A distinct upward trend becomes evident when smoothing the chart with a 7-day moving average, starting from September 9, with a temporary dip to $25,000. This upward trend persisted for the most part of the price rise from Monday, suggesting that miners have been exerting pressure on the price.

Distinguished crypto analyst Ali Martinez shared insights on X on potential future price targets for Bitcoin.

 

He highlighted a robust support region between $25,000 and $30,000, backed by the creation of a substantial number of UTXOs at that price range.

“These bars represent the quantity of existing bitcoins that last moved within the specified price bucket.”

He interprets this UTXO distribution as a support zone, indicating that investors who purchased at these levels are unlikely to sell below them, expecting higher prices. This is why he identifies the next resistance zone at approximately $38,440.

It’s worth noting that these tall bars could be misleading because they represent the quantity of UTXOs rather than the number of coins, i.e., volume.

BTC Price Analysis 

When analyzing Bitcoin’s price chart, it becomes evident that there is still potential for further upside. The recent uptrend that began on October 12 has been shaping a five-wave pattern, with the current upswing representing its wave 3.

A large correction soon
A large correction may occur soon

The current path implies that a modest higher high may soon occur, signifying the culmination of this particular upward move. This will likely be followed by a retracement, indicating the end of wave 4, and another anticipated surge leading to wave 5.

The target for this surge could hover just below the $40,000 threshold, aligning with significant horizontal resistance, as emphasized by analyst Ali Martinez’s UTXO distribution resistance. However, considering that this may mark the final wave of a higher-degree trend originating on November 21, a more substantial downturn is on the horizon.

If this indeed marks the beginning of a new bull cycle after a prolonged period of declining prices, the next critical milestone would be establishing the initial higher low of the bull market. This is likely to take the form of an ABC correction, representing wave 2 of a higher degree. Ideally, this correction should remain above the $25,000 level.

Should the price approach the anticipated peak of around $40,000 and then experience a 38% decline, it could potentially shake the confidence of short-term investors, prompting a reassessment of their positions.

Conclusion

While the recent upswing in Bitcoin’s price is undoubtedly bullish, several factors must align before we can confidently proclaim the beginning of a new bull cycle. While catalysts like the anticipated Bitcoin ETF and the short-squeeze have played a role in the current rally, a genuine bull cycle for Bitcoin necessitates more enduring and foundational triggers.

One of the significant upcoming events is Bitcoin’s halving scheduled for next year. Historically, the market tends to price in the anticipation of halving, often resulting in an uptrend leading up to the event and sustaining momentum post-halving.

However, to genuinely confirm the start of a bull cycle, a mere price surge and temporary bullish sentiment won’t suffice. We need to witness the emergence of a sustained uptrend, marked by the establishment of a higher low, indicating that the market is creating new support levels.

Skeptics still exist, with some predicting Bitcoin’s potential drop below $15,000. Nevertheless, if Bitcoin can establish a higher low, it would not only shift the narrative but also potentially convert many bearish investors into bulls. Such a move would solidify the belief that Bitcoin found its bottom last November.

Disclaimer

Please note that the contents of this article are not financial or investing advice. The information provided in this article is the author’s opinion only and should not be considered as offering trading or investing recommendations. We do not make any warranties about the completeness, reliability and accuracy of this information. The cryptocurrency market suffers from high volatility and occasional arbitrary movements. Any investor, trader, or regular crypto users should research multiple viewpoints and be familiar with all local regulations before committing to an investment.

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