Crypto market in sharp decline

Week by numbers

The last week has gone in a sharp downward direction on the crypto market. The price of the largest cryptocurrency bitcoin (BTC) fell by approximately six percent and the price second largest cryptocurrency ether (ETH) by approximately eight percent. The total market value (TOTAL3-OTHERS-USDT-USDC) of tokens ranked 3-10 by market value (excl. stable coins) decreased by about five percent, and the total market value of tokens outside the TOP 10 by market value by about eight percent.

Thursday drop

At the time of writing this (Thursday 4 July 2024 at 1:45 p.m.), cryptocurrency rates have fallen sharply in the last few hours. During the last day, the bitcoin price has fallen by about four percent, and ether by about five percent. The total value of the rest of the crypto market (excl. stablecoins) has decreased by about six percent.

The drop has brought the total value of the crypto market (excl. stable coins) very close to the previous bottom at the beginning of May.

Our interpretation is that this sharp drop is the market's reaction to data suggesting that there could be a lot of selling pressure coming into the market. Collapsed crypto exchange Mt. Gox’s wallets have seen movement, and according to the news website Coindesk, German police authorities have transferred $75 million worth of crypto assets to crypto exchanges, apparently in preparation for the sale.

Based on the available information, we think it is most likely that it would be a sharp one-time drop, from which we would recover quickly. Our primary expectations for the coming weeks of the crypto market are relatively positive (more on that below) and we consider it most likely scenario that this would not be a long-term drop in the price.

The level to watch is the bitcoin’s bottom in May of the, at around $56,500. We expect that this will work as a support level this time as well, at which the drop would stop. If the course falls below this level, the situation should be reassessed.

However, it is worth noting that even in this market downturn, price of the largest cryptocurrency, bitcoin, may be supported by the rotation of capital from smaller tokens to the relative "safety" of bitcoin. Even if the bitcoin price doesn't sink below the May bottom this time, it doesn't mean that it can't happen to many smaller tokens.

What’s next?

As Kvarn Pulse takes a slightly altered publishing schedule for July, in this newsletter we would like to offer some of our views on the prospects of the crypto market in the coming weeks.

The clear downward trend of the crypto market in the last few weeks and sharp drop the last few days naturally raises questions. Is it still a question of the bitcoin chopping in the "range" between 56,000 and 72,000 dollars, or has a more sustained downward trend started?

We will take a look  through a tool familiar from our previous newsletters, the relative strength of the US dollar. The strengthening of the US dollar signals a general "risk-off" sentiment in the market. Uptrends in the dollar have traditionally been challenging periods for the price development of high-risk investment targets such as cryptocurrencies.

In previous newsletters, we have often used the EUR/USD currency pair as an indicator of the relative strength of the dollar. This time we look at it through the dollar index (DXY), which compares the dollar to a basket of currencies.

In the attached graph, the bitcoin price and its ten-day moving average are shown as lines in the upper panel.

The lower panel shows the so-called Relative Strength Index (RSI) of the dollar index. Relative Strength Index readings above 50 typically indicate that the asset is in an uptrend.

We often find it useful to primarily monitor the DXY RSI, as it seems to us that it may tell more about the reflection of the dollar index on the crypto market than the absolute level of the dollar index.

Background color of the upper panel indicates whether the RSI of the dollar index is below 50 (background color red) or above 50 (background color green).

It can be seen from the graph that the development of the bitcoin price has generally been stronger when the background color is red, i.e. when the dollar index is in a downtrend. The only exceptions are the latter half of October 2023 and the latter half of February 2024, when the bitcoin price clearly rose, while the background color was still green.

However, it can be seen from the line in the lower panel that in both cases the direction of the RSI of the dollar index was clearly downward at that time, although it had not yet fallen below 50.

We can also see that when the background color changes from red to green, the bitcoin price has often at the same time fallen below its ten-day moving average, and correspondingly, when the background color changes from green to red, it has risen above the ten-day average.

So we can say that RSI of the dollar index has given fairly good signals as to whether a stronger or weaker than average price development should be expected from the bitcoin price. Having established this, we can move on to look at the developments of the last weeks and days.

It can be seen from the graph that from the beginning of June to these days, the background color of the upper panel has been green, meaning that the dollar index has been in an upward trend. It's not particularly surprising that over the same period we've seen bitcoin drop from the upper end of the range it became familiar with in the spring, from around $71,000 to around $57,000 in recent days. So far, the price drop has fully followed both the signal given by the dollar index and the resistance and support levels indicated by the technical analysis.

You can also see from the graph that overt the last few days the background color has changed to red again. This means that the dollar index would be turning into a downward trend. After a couple of days, we still have to keep open the possibility that it is a false signal, which can also be seen in places in the graph above.

However, it would seem that the dollar might be starting a downward trend. This could mean a relatively stronger period for the crypto market. The minimum level for this could be considered a sustainable rise above the ten-day moving average (around $62,000). Stronger resistance levels can be expected around $65,000, and almost certainly insurmountable resistance around $70,000.

We consider the most likely scenario to be that within about a week or two, the bitcoin price would rise above $62,000. On the other hand, if this does not happen, it would also be an interesting signal in itself. A situation where Bitcoin is unable to rise while the dollar index falls indicates significant weakness.

The graph above depicted the relationship between the bitcoin price and the dollar index in the cryptocurrency bull market. When the background has been red, the bitcoin price has typically clearly risen, and when the background is green, the price has risen less or fallen slightly. To get the overall picture, it's also good to take a look at how the same graph looked like the bear market in 2022.

In the bear market, when the background was green (the dollar index was rising), the bitcoin price often fell by several tens of percent. With the background in red, the price consolidated after the downward movements before the next decline. Exception to this was seen in November 2022, when the price clearly dropped, although at the same time the dollar index was quite weak. This is explained by the sudden market disruption caused by the collapse of the crypto exchange FTX, from which the price also recovered sharply and ended the red period higher than they started from.

If the downward trend of the dollar index is really starting, and if the bitcoin rate does not show a clear strengthening during this period, this would point to a clear weakness of the crypto market and force us to also consider the possbility that the bull market would already have come to an end. As a minimum threshold, we consider a sustainable rise of the rate above $62,000, which means about nine percent of the level of about $57,000 at the time of writing.

Bitcoin's 200-day moving average is also important to monitor in terms of the continuation of the bull market. Bitcoin's price crossed this level in January 2023. From the attached graph, it can be seen that at the same time the RSI of the dollar index began to spend more time between 0-50, which is, as seen, a relatively more favorable condition for cryptocurrency prices.

In the fall of 2023, bitcoin traded below its 200-day moving average, leading some to question the entire bull market. These doubts may have been alleviated by the observation that at the same time the RSI of the dollar index was overbought, and could soon be coming back down, as it did. At the same time, the crypto market returned to the upward trend.

At this time, we have not yet seen any signs of the DXY RSI rising to overbought. However, the last two bottoms of the RSI have remained higher than the previous ones. If this trend continues, favorable conditions for the crypto market could be shorter and less favorable in the future.

We hope that these views would help the reader in following the crypto market in July. Basically, we are relatively optimistic about the outlook for the next few weeks, after as the current drop finds its bottom. However, we also keep our eyes open for a continuation of the weaker price development.

Kvarn X Pulse will be published in July with a slightly less frequent schedule. The next Pulse will be released in the second half of July, and after that in August we will return to our normal schedule.

The material contained in the Kvarn Pulse is produced solely for the purpose of marketing communication. Any information conveyed through Kvarn Pulse should not be construed as an offer or an invitation to make any purchase or sale decisions, or as an encouragement to make investment decisions about any investment object. Copying or borrowing the content of the newsletter without Kvarn's express permission is prohibited. The information presented in the newsletter pertains to the situation prevailing at the time of writing, and the information may or may not have changed. Kvarn Capital Oy does not guarantee the accuracy or completeness of the information contained in the newsletter or referred to in the newsletter.