About a week ago, I posted this and made a bullish case for the overall cryptocurrency market. In particular, I zoomed into the 2 largest cryptocurrencies Bitcoin and Ethereum for my analysis. Now let's take a look at what is going on to them again. However, I will have to break it into 2 parts as the analysis on BTC is enough content for a post and likewise for ETH.
BTC is above $9240
At the point of writing, BTC was above $9240. Why is this significant? It is because losses resulting from the flash crash, which took place on the 7th March, have all been regained (chart below). If you held on to your bags and/or accumulated more after the crash, you are probably very happy now.
Crossing the $8k level led to the burst in price
In my earlier post, I mentioned that the $8k level is important for BTC. This is because it is the 200d SMA, 100d SMA and also a psychological level to overcome. In addition, it has also crossed the red trendline which I charted. The line was a previous support which turned into resistance (double-crossing piece of ****). Noticed how BTC was testing the red trendline multiple times until it finally broke above it. Chart below.
In the chart above, you might also notice the cyan trendline. It is a longer term trendline which stretches all the way back to 2018. In the weekly chart below, you will be able to see it clearer. The cyan trendline had held the BTC price during Jun - Nov 2018 period. The price also clung on to this trendline between Nov 2019 and early Jan 2020.
The confluence of all these key levels made $8k a tipping point for BTC, at least in the short term. Technical analysis is an interesting field. Some say that it is purely a self-fulfilling prophecy and I agree to a large extent. As long as there are people who believes in TA, these chart levels will turn out to be important.
If TA is a self-fulfilling prophecy, then you have to kind of guess which are the points fellow traders are looking at. Hence, a confluence of a number of different levels at $8k makes important. This is because different traders view things from different perspectives and a confluence raises the probability that there will be more traders agreeing with your viewpoint. This is likely the reason why BTC shot up from $8k to almost $9.5k within a couple of days.
What are the next important levels?
I struggle to find what the next important level is as I cannot see any possible confluence of higher levels that people might be interested in. I personally am observing 2 levels. The first one being the purple declining trendline that BTC price is touching right now. If you refer to the earlier weekly chart, the purple downward sloping line connects the previous macro tops that we saw in the past 2-3 years. That is roughly the $9450 level and I will certainly like to see BTC price convincingly over the level.
The other level will be the previous macro high. On the weekly chart, the nearest level will be $10,550. However, it will be really bullish if it goes above the $13,800 level which was the event earlier high. All these levels are marked out in the chart below,
Something more fundamental
In my earlier post, I gave a number of reasons to be bullish of Bitcoin in the coming weeks or months. But the stock-to-flow model is something which I have not mentioned. PlanB wrote about the Bitcoin stock to flow model in this post last year and the basis of it is that the value of a provably scarce asset is correlated with its stock-to-flow ratio.
Stock-to-flow, SF = stock / flow
Stock is the size of the existing stockpiles or reserves. Flow is the yearly production. On this basis, PlanB plotted the SF and the market value of Bitcoin on a chart and voila, here is what you get,
As you can see, there is a clear correlation between the S2F and value on the log chart. As what PlanB wrote,
Fitting a linear regression to the data confirms what can be seen with the naked eye: a statistically significant relationship between SF and market value (95% R2, significance of F 2.3E-17, p-Value of slope 2.3E-17). The likelihood that the relationship between SF and market value is caused by chance is close to zero. Of course other factors also impact price, regulation, hacks and other news, that is why R2 is not 100% (and not all dots are on the straight black line). However, the dominant driving factor seems to be scarcity / SF.
So, if you believe in his model, how do you get the updated data? Fret not, Digitalik hosts a website which provide updated S2F chart. Screenshot below,
As you can see, the S2F ratio is bumped up significantly after the rewards halving which theoretically will also lead to a leap in BTC price according to the model. And I should not have to remind you that the halving is just 12 days away.
Once again, I am just sharing my thought process and please do not take it as financial advice. Due diligence and research are still required for your own investment. If you like this content, stay tune for the analysis on ETH. Do drop me some comments and let me know if you want me to analyze some other crypto projects.