On Wednesday, the prices of cryptocurrencies experienced a significant decrease compared to the price recorded a few days ago. According to CoinMarketCap, the total market cap dropped by 2.6% within the last 48 hours, with Bitcoin falling by around 3.1%, Ethereum by 3.4%, and other popular cryptocurrencies such as ADA, BNB, MATIC, SOL, DOGE, and DOT also experiencing price drops ranging from 2-5% during the same time period.
Before this drop, Bitcoin showed an ascending triangle pattern in the short term, which some experts believed would lead to a bullish breakout and a rally toward their next major resistance level, around $28,000.
However, these optimistic predictions did not come true due to Bitcoin falling behind its short-term uptrend and dropping back below the $24k mark. Now, those who are bearish on Bitcoin are looking toward a test of the 21-Day Moving Average within the $23k mark. So, what's the reason behind this recent significant drop in cryptocurrencies? Let's look into it.
The Reason For Cryptos Drop
The decline in the value of cryptos on Wednesday can be attributed to a general trend towards risk aversion in broader macroeconomic flows. This is reflected in the drop of US stocks, which have fallen below a medium-term bullish trend channel and its 21-Day Moving Average. Concerns about a potential earnings recession after weak performances from Home Depot and Walmart, as well as fears of further rate hikes from the US Federal Reserve, are some of the major concerns contributing to this downward trend.
Although there has been a weaker correlation between cryptocurrencies and US stocks in recent weeks, they still tend to be positively correlated, especially with big tech names. Additionally, the US dollar is strengthening due to increased expectations of Fed rate hikes, as reflected in the DXY's recent breakout above a medium-term bearish trend channel.
While US yields are lower on Wednesday as traders seek safety in bonds, they have been increasing in recent weeks due to heightened expectations of Fed tightening. This is partly due to a series of robust US data reports in January, including jobs, ISM PMI surveys, inflation data, and more recent flash February PMI figures, which have led markets to anticipate more Fed interest rate increases this year.
A few weeks ago, the market consensus was that the Federal Reserve would increase interest rates once in March, bringing the range to 4.75-5.0%. However, based on data from the CME, the current base case is for two additional interest rate hikes, bringing the range to 5.25-5.5%.
Cryptocurrencies generally have a negative correlation with a strong US dollar and higher bond yields. The latter increases the opportunity cost of holding "risk-sensitive" assets, which is how most macro investors categorize cryptocurrencies. As a result, higher bond yields tend to reduce the incentive to keep cryptocurrencies.
Will Crypto's Resilience Against Macro Headwinds Continue? Recent Golden Crosses Suggest Yes
The challenges faced by the cryptocurrency market are not new, and US stocks have been struggling since the start of the month, with the S&P 500 experiencing a decline of approximately 1.5%. However, despite these macroeconomic headwinds, cryptocurrencies have demonstrated significant resilience recently, with Bitcoin still up around 2.6%.
This resilience can be attributed to a growing list of technical and on-chain indicators that have turned bullish for big cryptocurrencies like Bitcoin in recent weeks. One such bullish signal that has garnered a lot of attention from investors is Bitcoin's current "golden cross," which occurs when the 50-day moving average (DMA) crosses above the 200-day moving average.
Bitcoin has experienced only seven golden crosses in the past ten years, and some analysts view this event as a good purchase signal. The 50-day and 200-day SMAs are technical indicators widely followed by investors, and a golden cross may result in increased buying pressure within the Bitcoin market if it entices more buyers to enter.
However, the success rate of golden crosses as a Bitcoin buy signal is mixed. While some investors consider it in their trading decisions, it is not a guaranteed buy signal. If an investor had bought Bitcoin during each of the previous seven golden crosses and held the investment for 90 days, they would have made a profit four times out of seven. The profit margin varied between 10-80% significantly. One time out of seven, the investor would have broken even, and on two occasions, they would have incurred losses of 20% and 45%.
If you had held Bitcoin for a year after each of the last seven golden crosses, you would have been up five out of seven times. However, the magnitude of these gains varied widely, ranging from 25% to 400%. The two instances in which you would have experienced losses occurred during the severe bear markets of 2014 to early 2015 and late 2021 to late 2022.
Nevertheless, the results are more optimistic if you refine the buy signal to only purchase when a golden cross occurs after the 50-Day SMA has been below the 200-Day SMA for a prolonged period. In particular, if you bought and held for 365 days after July 2015, October 2015, and April 2019 golden crosses, you would have earned returns of roughly 130%, 120%, and 25%, respectively.
The most recent golden cross also happened after a prolonged period in which the 50-Day SMA was beneath the 200-Day SMA, which is similar to the previous bullish scenarios. Based on past trends, a 100% gain in the next year is possible, which implies that Bitcoin could reach the mid-$40,000s in early 2024.
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