Be on the Lookout for These 4 Bitcoin Bear Signals

While it’s easy to get caught up in bitcoin’s parabolic rally, four bearish factors could impact prices over the coming months.

Bitcoin has experienced a meteoric rise during 2021, doubling from last year’s final price of $29,112 to the current all-time high at $58,332. One of the leading catalysts for this surge has been a notable uptick in institutional interest and investment, including Tesla announcing it had purchased over $1.5 billion worth of bitcoin as part of a new investment policy. The recent emergence of two bitcoin exchange-traded funds (ETF) also provided a major boost to overall sentiment because more investors will be able to gain exposure to the leading crypto asset.

While these fundamentals are incredibly promising for bitcoin’s long-term prospects, there are a number of indicators likely weighing on the current uptrend. This does not mean the price will necessarily fall, but they are signs that a cooling-off period is overdue.

On the weekly BTC/USD Coinbase chart, we can see that trading volume has decreased since an earlier price peak at $42,000 on Jan. 4, even though the price of bitcoin has risen by a further $16,000, give or take. This discrepancy between volume and price is known as a volume divergence and usually signals that fresh capital entering the market is drying up and buying momentum is waning.

Volume divergences sometimes imply that bulls are flipping into holders or waiting for more certainty in the market before buying more bitcoin. In these instances, prices tend to push sideways and volatility drops.

Volume isn’t the only indicator showing a strong divergence on bitcoin’s trading chart right now. There’s also a noticeable deviation on the weekly Relative Strength Index (RSI) – a leading momentum indicator that shows when an asset is overbought (likely to crash) and oversold (likely to rise) by calculating the average gains and losses over a 14-day period. The indicator line oscillates from zero to a hundred. As a general rule, an asset is considered overbought whenever it’s above 70 and oversold when it’s under 30.

Right now, the indicator line reads 73 on the weekly chart, which suggests the asset is overbought and due for a correction. Again, while RSI divergences are typically more reliable than volume divergences for highlighting possible trend reversals, they’re sometimes wrong – particularly in greed-driven markets when investors enter into a buying frenzy.

Bitcoin CME gaps are openings that appear on the CME bitcoin futures chart (ticker: BTC1!) whenever the traditional market closes and reopens during periods of high market volatility in the crypto market. This happens because crypto markets are open 24/7 while the U.S. stock market closes over the weekend and ceases trading at 4 p.m. ET, Monday to Friday. 

Prices on the CME bitcoin futures chart are fixed during closing hours, so if the price of bitcoin is $50,000 when the CME closes, that’s where the price will stay until the exchange reopens. However, because bitcoin futures contracts track the price of bitcoin, which is constantly being traded on crypto exchanges, the price suddenly catches up with the crypto market value when the CME reopens. If the price has changed substantially over the weekend, it creates large gaps on the CME chart.

On Dec. 25, 2020, the U.S. stock market closed for Christmas and reopened the following Monday on Dec. 28. During that festive period, the price of bitcoin spiked from $23,795 to $26,353, creating a $2,740 gap on the CME bitcoin futures charts. So far, this gap has not been filled.

Why are these gaps so important? CME gaps, for no proven reason, act like magnets to the price action and have a statistically high tendency of filling – meaning the market price usually returns back to its original point, which in this case would be $23,795. A study conducted in 2019 revealed that CME gaps fill over 95% of the time.

While this suggests prices could drop to the low $20,000s, it’s worth noting there are three other gaps below in bitcoin’s chart that still haven’t been filled, including one at $9,665.

March has consistently been the worst-performing month for bitcoin, with a mean average loss of 14.725% since 2017 when the market started to gain traction. The second-worst month, on average, is September, with a mean loss of 9.05% over the same time frame.

While past performance does not guarantee future results, history strongly suggests there’s a seasonality to bitcoin market sentiment. This behavior could be attributed to the upcoming tax year on April 15 in the U.S. and traders selling bitcoin to cover their tax bills.