Bitcoin On The Verge Of Breakout Toward $30,000, But These Metrics Suggest The Market Could Be Overheated
According to technical analysts looking at the Bitcoin market on a short-term time horizon, the world’s largest cryptocurrency by market capitalization looks like it could be on the verge of a breakout towards the psychologically important $30,000 level and perhaps further towards the next major resistance zone around $32,500-$33,000 .
Looking at BTC/USD on the four-hour candlesticks, a bullish ascending triangle pattern appears to have formed. These technical patterns are often formed ahead of bullish breakouts.
Although bulls are being warned – Bitcoin formed a similar pattern between the 16th and 21St February, but failed to break higher (in the immediate future anyway), and instead spent the next few weeks pulling back down.
Traders are looking ahead to Wednesday’s US Federal Reserve policy meeting as the next potential bullish catalyst.
The bank is expected to raise rates by another 25 bps to a range of 4.75-5.0%, but there is a chance they could hold off amid concerns about cracks in the US banking system.
Analysts have argued that regardless of the outcome (ie, hawkish or dovish), Bitcoin could benefit.
On the one hand, a hawkish Fed could worsen the banking crisis and further stimulate a safe haven for Bitcoin (this has been an important tailwind for Bitcoin in recent weeks).
On the other hand, a dovish Fed could cause economic conditions to ease, which could also boost Bitcoin (and broader crypto markets).
While many bulls feel confident about Bitcoin’s near-term outlook, it may be wise to temper expectations of further short-term gains, given that a number of metrics point to the Bitcoin market getting very hot.
The Bitcoin market is very hot right now
In the wake of the recent surge from previous monthly lows below $20,000 to current levels above $28,000, Bitcoin’s 14-day Relative Strength Index (RSI) has shot from oversold territory to overbought territory (defined as above 70).
Bitcoin’s RSI was last around 71.5.
That does not necessarily mean that the market cannot continue to push higher. On 10 JanuarythBitcoin’s RSI pushed into overbought territory, but prices continued to rise from $17,500 to around $23,000 by the end of the month regardless.
Elsewhere, Bitcoin is trading at historically significant highs versus many of the key moving averages. BTC/USD was last around 18% higher compared to the 21-day moving average (DMA), 19% up against the 50DMA, 32.5% up against the 50DMA and 40% up against the 200DMA.
That’s the highest the cryptocurrency has been relative to the 100 and 200 DMA since late 2021, right when Bitcoin hit all-time highs. Meanwhile, it is close to the most that Bitcoin has been up this year since the 21 and 50 DMA.
An alternative way to look at Bitcoin market momentum and assess whether the cryptocurrency is becoming overloaded is to look at the Z-score of the 200DMA.
This is essentially how many standard deviations Bitcoin is (at the current price) above its average price over the last 200 days.
Bitcoin’s Z-score of the 200DMA recently crossed 3, meaning that at current levels above $28,000, BTC/USD is more than 3 standard deviations above its average price over the past 200 days.
This is a rare event in Bitcoin’s history and usually only happens during aggressive bull markets.
Recent history suggests that Z-scores rising above 3 do not necessarily mean an imminent correction is coming.
In late 2020/early 2021, Bitcoin’s Z-score was above 3 for an extended period where the BTC price continued to experience exponential gains, before the rally finally began to cool.
Bitcoin trades far above various “fair-value” metrics
Another alternative way to assess whether the Bitcoin rally is getting too hot is to look at where the current Bitcoin price is trading versus various estimates of the cryptocurrency’s “true value” based on its historical relationship to traditional asset classes with which it has a correlation.
The graph below shows how much above or below Bitcoin is trading relative to fair value estimates given the cryptocurrency’s historical relationship to the S&P 500, DXY, US 2-year yield and US 10-year yield over the past 60 days. Fair value is calculated by calculating using regression analysis.
Bitcoin is currently trading around 30% above its fair value for each of these assets, near its highest level since early 2021. At the very least, that suggests we have a very hot Bitcoin market on our hands.
Can the Bitcoin Market Continue to Heat Up?
While various calculations suggest that things are indeed warming, history says that things could still get much hotter.
The RSI has been higher for longer and more sustained periods.
Bitcoin has been trading at more extended levels versus major moving averages for prolonged periods during bull markets.
Bitcoin’s Z-score to 200DMA has also remained at higher than current levels for longer, only has Bitcoin’s price versus various measures of near-term fair value.
Meanwhile, as discussed in recent articles, various chain values related to network activity, the balance of USD-denominated Bitcoin wealth among wallets and Bitcoin market profitability and all screaming bull market signals.
If we are indeed facing another global financial crisis and central banks like the Fed are forced to start cutting interest rates again/return to quantitative easing, the Bitcoin bull market may yet go into overdrive.
