Recent Price Action
Bitcoin — For the fourth consecutive week, the price action in Bitcoin has been bearish. The intraday support level @ 47,274 was violated on 10 December. Please review Chart #1, which contains trading activity for the past ten days. The intraday chart will remain bearish until BTC can penetrate 51,165 (Chart #2). On a short-term basis, the most likely scenario is a continuation of lower prices.
Based on the daily chart, BTC is extremely oversold. The Relative Strength Index (RSI) is used by many crypto traders to determine the strength or weakness of the market. A reading above 70 signifies that BTC is significantly overbought, while a reading below 30 represents a market that is deeply oversold. For the first time in six months, Bitcoin RSI dropped to 30 on 13 December (Chart #3). According to the RSI indicator, Bitcoin is overdue for a substantial rally. Most likely, BTC recorded a short-term bottom on 13 December @ 45,904. Crypto traders should expect a countertrend rally within the next few days.
Ethereum — The short-term price action in Ethereum is very similar to Bitcoin. ETH appears to be rolling over to the downside. On 10 November, ETH recorded an all-time high @ 4,865. After trading sideways for two weeks, ETH attempted to generate a new high on 1 December. The market was unable to generate enough momentum to push above 4,865. This is considered a bearish signal because a lower high was formed on the Ethereum chart. Please review Chart #4.
Another bearish factor for Ethereum is the recent violation of the bullish trendline. ETH had been in a bullish trend since 20 July. However, the trendline was penetrated on 6 December (Chart #5). At least for now, the short-term trend for ETH is bearish.
Dogecoin — One of the most exciting coins in 2021 has been Dogecoin. DOGE became incredibly popular in February when Elon Musk began mentioning the token in his Twitter conversations. Between February and April, Dogecoin generated an incredible rally of 7,200%, as the entire global crypto community became obsessed with Dogecoin (Chart #6). The rally in DOGE is a perfect example of what can happen to a speculative asset when a mania develops, and investors become fearful of missing out on the huge gains. This phenomenon is known as FOMO, and it usually occurs near the end of a massive rally.
DOGE is nothing more than a meme. The token has very few practical use cases. The truth is, the only legitimate use case is that Dogecoin can be used to pay for merchandise on the Tesla website. Most likely, DOGE will fall to its intrinsic value, which is probably less than one cent per token. In fact, DOGE has declined 77% during the past six months.
Why Did Cryptocurrencies Decline During The Second Half of 2021?
Cryptocurrencies enjoyed a spectacular rally during the first few months of 2021. For example, Bitcoin generated a gain of 124% between January and April (Chart #7). Other coins and tokens followed BTC, going to much higher prices. However, the crypto rally completely lost its momentum near the end of April. Cryptocurrencies have been struggling to recapture bullish energy. Why have digital currencies turned bearish during the past six months? When will the bulls recapture the momentum? Let’s discuss the details.
In response to the global pandemic in Q1 2020, G20 central banks introduced several lending programs designed to provide financial assistance to businesses and consumers. In addition to the lending programs, many central banks substantially increased their balance sheets trying to encourage consumers to invest in the financial markets, including stocks, bonds, commodities, and cryptocurrencies.
The amount of financial stimuli injected into the global economy in 2020 was unprecedented. Never before in the history of financial markets had so much money been given to businesses and consumers in the form of loans, grants, and financial assistance. In the span of fewer than six months in 2020, trillions of dollars were added to the global financial system. Consequently, consumers had enormous amounts of disposable income. Much of this newfound wealth was invested in cryptocurrencies.
The pandemic low for BTC was recorded in March 2020 @ 3,925. Immediately following the low, Bitcoin embarked on a massive rally for the remainder of 2020. BTC advanced 638% during the final nine months of the year (Chart #8). The majority of this rally can be attributed to the stimulus money that was dispersed to businesses and consumers following the onset of the global pandemic. The cryptocurrency was not the only asset class that rallied in 2020. Stocks and commodities also experienced substantial advances. Many of these pandemic stimulus programs carried over into 2021, which explains why Bitcoin and other crypto-assets continued to rally through the first quarter of the year.
During the past few months, several G20 central banks have introduced plans to eliminate the aggressive monetary stimulus programs from 2020. The majority of these programs will be phased out of existence over the course of the next 6 to 12 months. For example, in the United States, the Federal Reserve recently announced that it would begin reducing the size of its balance sheet and simultaneously raise short-term interest rates beginning in 2022. The Federal Reserve is signaling to the financial markets that the “easy money” from 2020 is ending. This explains why Bitcoin and other tokens have struggled to generate any type of momentum during the past few months. For the past 18 months, central banks have essentially provided speculators with money to buy cryptocurrencies. The free money will disappear in 2022.
Does this mean that 2022 will be a bearish year for BTC and other crypto assets? Not necessarily. Many large institutional investors are planning to invest in Bitcoin over the course of the next 12 months. These institutions have been patiently waiting for better regulatory clarity before investing in crypto. It appears that several of these regulatory hurdles will be cleared in 2022. Therefore, institutions could easily replace individual investors as the next big source of money to enter the crypto universe. If 2022 is a bullish year for cryptocurrencies, institutional investors will be responsible for creating the rally.