Bitcoin And Ethereum Coming In From The Cold (Technical Analysis)


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The best carpet shooter of all time

In 2020 and much of 2021, cryptocurrencies were easy money. Actually, they were two types of easy money. It was easy money if you traded it, and it was easy money if you got paid to promote it as something everyone, including your grandparents, should trade.

And, like all easy money schemes, it came to an ignominious end.

From this:

Crypto Bros buy real estate

Crypto Bros buy real estate (NY Post)

To this:

crypto bankruptcies

Crypto Bankruptcies (The Tokenist)

The Wild West days of hopping aboard whatever currency was hot that week are probably over as a reliable way to make money (don’t laugh, for many I was a reliable way to earn money for a while).

All risk assets have been sold in 2022

Since the 2021 peak, even the top two crypto names have seen a heavy sell-off. Do you think your S&P-heavy 401k is suffering? Is your hi-tech beta portfolio causing you pain and worry? Imagine if you had bought the crypto dream and waited for it with anticipation to the Moon, the Lambo or whatever.

Here’s the S&P 500, the Nasdaq-100, the BTC-USD cross, the ETH-USD cross, and the ARK Innovation ETF (ARKK) over the past 12 months, shown as the percentage drop from the high for that period.

Graph of % discount in maximums

% Off Highs Chart (YCharts.com)

S&P painful, Nasdaq even more so; crypto and ARKK were lumped together with a 2/3 drop in value. Oh.

This has of course led to a certain level of fear in crypto.

Crypto Fear Index vs.  Greed

Crypto Fear Index vs. Greed (Alternative.me)

Now, a theme of our work is that in the stock markets it is always opposite day. So if something gets hit and FinTwit has decided that he is dead and buried forever, our interest is piqued.

We anticipate growing strength in certain crypto assets

Crypto, we believe, is going through a fork and transformation. We believe that the two leading systems, Bitcoin and Ether, will move away from the altcoin pack. We believe that the two systems will be professionalized and institutionalized. That they will become more like values ​​both in practice and, most likely, in principle and, over time, in law. We hope this is all to the chagrin of both the “let the code be free” math types and the “Wen Lambo” crowd of crypto brothers. But it will be to the benefit of institutional investors and those who choose to invest in the manner of those institutions.

In our analysis of individual stocks, we use the notion of the “Wyckoff Cycle” which, as you know, is an idealized way of how large account players can create and profit solely from the buying and selling activity itself, not from any underlying intrinsic activity. worth. We have written about this extensively elsewhere, including here.

We believe that Wyckoff-type institutional accumulation has already begun in both Bitcoin and Ether.

We carry out daily monitoring against the main stock market indices; we initially did it as a sort of leading indicator of risk appetite. Few instruments have as high a beta as crypto; Bitcoin and Ether are the most liquid crypto instruments; so, we think, we can use them as an advance warning of what may happen each day or week in the S&P or the Nasdaq. And it turns out that this is not a bad tool. It’s not perfect, of course, but it’s not bad.

Where this became really interesting, however, was after the June lows were hit in the equity indices. As you know, there was a violent rally to the August highs and an equally violent drop to the October lows, which were down the June lows in the S&P, the Nasdaq and the Dow, and a double test of the same lows in the case of the Russell. And the crypto has a high beta, meaning it overreacts to changes compared to what S&P says, a similar pattern plus some amplification is to be expected. Right?

Wrong. Look at. Here’s the S&P: the Nasdaq and the Dow do the same thing, by the way.

SPY June vs October 2022 lows

SPY June vs October 2022 lows (TrendSpider, Cestrian Analysis)

Now, look at BTC.

BTC June Lows

BTC June Lows (TradingView, Cestrian Analysis)

And in ETH.

ETH June lows

ETH June Lows (TradingView, Cestrian Analysis)

So, at first glance, this already seems interesting. Why would two very scary assets hold June lows when the major stock indices did not?

Well, there are two reasons, in our opinion, not mutually exclusive.

First, derivatives. Indices and their ETFs are subject to substantial pressure from the massive wall of capital pouring into the options market. In fact, if you look at major S&P reversals through the lens of the options market, you can see the power of option flows: Reversals tend to occur on high-volume option expiration dates, after which market makers rebalance their hedges to get back to a neutral delta position. Again, here is the S&P. (The underlying analysis includes the work of SpotGamma.)

S&P - Options Expiration Impact

S&P – Options Expiration Impact (SpotGamma, Cestrian Analysis, TrendSpider)

Crypto has nothing like this level of derivatives market pressure. Therefore, we do not believe that the strength of cryptocurrencies can be explained through the expiry of options; however, you can argue that the weakness in equity indices in September and October is due to the impact of a wall of put options being bought by investors.

No, our second reason is that we believe that Bitcoin and Ether are now being quietly accumulated by institutional investors. We believe that the price and volume activity supports this thesis.

Let’s look at Ether first, because the evidence there is more convincing than Bitcoin, in our opinion.

ETHUSD - Volume by Price Analysis

ETHUSD – Price Volume Analysis (TradingView, Cestrian Analysis)

The blue/yellow bars on the right side of the chart show the volume traded at each price level. The chart starts in July 2021 and the volume per price indicators do the same. The largest purchase volumes have been in the range of approximately $1050-$1725.

Zooming out, you can see that this price zone largely corresponds to typical ‘Wave 2’ retracement levels (surprise and shock!).

ETHUSD Fibonacci Retracement Analysis

ETHUSD Fibonacci Retracement Analysis (TradingView, Cestrian Analysis)

And that, from our point of view, is no accident. The reason you see support for shock and awe sell-offs around this level and deep retracement velocity (a wave 2 in Elliott Wave parlance) is that this dumping level drives the despair you see in retail cryptocurrencies right now (or in retail e-commerce). , etc., for that matter). Institutions, not prone to despair, have long known how to buy fear, embrace abandonment. And this we believe is happening in Ether right now.

If it pulls back, you may start to see a higher degree Wave 3 (which could at least hit a new high above $4880 if we get the pattern right) take shape with an i, ii and iii above those June lows. Like this:

ETHUSD Smallest Degree Wave Pattern

ETHUSD Smallest Degree Wave Pattern (TradingView, Cestrian Analysis)

Consequently, we are bullish on Ether. Should ETH-USD break above $2,035 in the short term, it would be one more confirmation of our bullish thesis.

Turning now to Bitcoin, which has a less compelling chart in our opinion, but still has signs of accumulation in its volume from price action, which has again hit heavy volumes in the same wave 2 retracement zone from wave 1. hit from 2020 lows to 2021 highs.

BTCUSD Volume x Price at 786 Retrace

BTCUSD Volume x Price at 786 Retrace (TradingView, Cestrian Analysis)

Why less convincing than Ether? Because we still don’t see the characteristic 1 up, 2 down, 3 up pattern of a new bull phase taking shape. But you can see the buildup for yourself.

We are bullish on Bitcoin, but not as bullish as we are on Ether.

Cestrian Capital Research, Inc – October 31, 2022.