Despite the Federal Reserve and other central banks continuing to signal that the ongoing recession will be the worst of the modern era — and potentially worse than the Great Depression — markets have continued to chug higher.
Many U.S. equities are now only a mere 10% shy of their all-time highs, and Bitcoin has held strong in the high-$9,000s, up more than 150% from the capitulation lows of $3,700 experienced on “Black Thursday.”
Though analysts say that the chances Bitcoin experiences a pullback after its rally are increasing, with technical and on-chain data becoming bearish in the short term.
Bitcoin Is Preparing for a Pullback, Analysts Agree
Cryptocurrency derivatives trader Cantering Clark recently identified three signs of why investors “need to be careful at this level.” They are as follows:
- Bitcoin’s momentum is slowing, with the cryptocurrency pausing at $9,600-9,800 as indicated in the chart at the top of this article.
- Open interest in Bitcoin futures contracts on platforms like BitMEX and the CME are increasing. This, coupled with decreasing prices, is purportedly indicative of a “weak” market, according to a commonly-shared market interpretation table of price, volume, and open interest.
- The funding rates on Bitcoin perpetual futures contracts — the fees long positions pay to short positions to maintain the market — has trended higher and higher. This signals that longs are becoming more aggressive with their buying. Logically, that may lead you to think that prices will go higher due to buy-side activity. But high funding rates are often seen at the tops of trends as long positions become increasingly unsuitable to hold.
I am in a small long but it's really just targeting the next sticky area at this high.
Need to be careful at this level.
-Momentum is slowing
-Funding going more positive
The resistance is resistance until it no longer is.$BTC
— Cantering Clark (@CanteringClark) May 17, 2020
Adding to this, one trader observed that there is a block of sell orders around $10,000 on leading exchanges like Bitfinex and Binance, which will halt any short-term rally. The data suggests that as of May 17, there was around ~4,200 Bitcoin worth of sell orders from $9,900 to $10,600, the majority of which are clustered in and around $10,000-10,400.
The on-chain metrics share a similarly-bearish story. Three of crypto intelligence firm IntoTheBlock’s metrics — “smart price,” “net network growth,” and “large transactions” — are currently bearish.
Stocks Could Fall Too
Adding to the bearish outlook that Bitcoin has in the short term, an increasing number of analysts and billionaire investors are expecting the stock market to retrace, which could drag the cryptocurrency market lower with it.
Speaking to CNBC last week, billionaire investor David Tepper remarked that the stock market is “maybe the second most overvalued,” behind the Dotcom bubble at the turn of the century:
The market’s pretty high and the Fed’s put a lot of money in here … the market is by anybody’s standard pretty full. There’s a lot of liquidity there and the Fed’s still there. It’s too hard to say the market can’t go up or something like that, but it’s not a very good risk-reward market.
This was echoed by legendary macro investor Stan Druckenmiller, who said that the risk-reward for equities is the worst he’s seen in his entire trading career.
Bitcoin, of course, could rally through a falling stock market, but the Kansas City Federal Reserve has found that during times of economic “stress,” the cryptocurrency operates in concert with the stock market.