The price of Bitcoin has increased from $10,530 to as high as $11,720 on Binance in the past week. Following this strong short-term rally, three key factors suggest a major correction is unlikely.
The potential catalysts that would likely prevent a deep Bitcoin pullback are optimistic on-chain indicators, a positive high time frame technical structure, and trading activity trends.
What Triggered Bitcoin Momentum to Initially Slow From Mid September to Early October?
In mid September, the momentum of Bitcoin slowed amidst a marketwide cryptocurrency crash. From September 19 to September 23, the Bitcoin price dropped from $11,179 to as low as $10,136 on Binance. After this 9% fall, Bitcoin had continuously shown slowing momentum until October.
A series of negative events from October 1 to 4 further amplified the selling pressure on Bitcoin. On October 1, the U.S. Commodities and Futures Trading Commission (CFTC) and the Department of Justice (DoJ) charged BitMEX with violating the Bank Secrecy Act. Within a two hours time frame, the price of Bitcoin fell from around $10,900 to $10,500 on Binance following the DoJ’s public statement.
Then on October 2, U.S. President Donald Trump confirmed on social media that he contracted COVID-19. President Trump’s unexpected positive COVID-19 test caused both cryptocurrency and equities markets to rattle.
On October 4, President Trump abruptly ended stimulus talks, stating that the discussions would be pushed to post-election. The U.S. presidential election is scheduled for November 3, which means stimulus by the year’s end is unlikely. The pushback on stimulus additionally led Bitcoin to slump, causing it to stagnate at around $10,500.
But despite the negative macro events throughout the past week, Bitcoin has now recovered beyond $11,300, stabilizing between $11,300 and $11,500. The resilience of Bitcoin, along with positive fundamental and technical factors, significantly reduces the probability of a major price drop.
Supply and Bitcoin Exchange Reserves Indicate Low Selling Pressure
Numerous on-chain indicators demonstrate a similar narrative for Bitcoin in the fourth quarter: low selling pressure and high HODLer activity. The term “HODLing” is often used within the cryptocurrency market to describe the act of holding onto Bitcoin for extended periods.
Since the March 13 crash of Bitcoin when the price dropped below $3,600 on BitMEX, reserves of Bitcoin on exchanges have substantially dropped. When traders and individual investors sell Bitcoin, they typically move it to exchanges. Hence, when selling pressure rises, the Bitcoin reserves of exchanges rise in tandem as deposits grow.
The continuous decline in exchange reserves over the past seven months indicates that the selling pressure on Bitcoin is dropping. Analysts have described the trend as a “sell-side liquidity crisis,” given that the number of sellers has been dropping while the demand has been increasing. Consequently, the price of Bitcoin has strongly rebounded since March.
According to on-chain analyst Willy Woo, a drop-off of Bitcoin on spot exchanges is a highly optimistic sign. The analyst emphasized that the trend shows investors are likely moving funds from exchanges to cold wallets to securely store BTC. Cold wallets are offline wallets that are not hackable because they are not connected to the internet.
“When coins on spot exchanges drop, it's a sign that new buyers are coming in to scoop coins off the markets and moving them into cold storage HODL, we are seeing new HODLers right now. Very macro bullish,” Woo said.
Woo further noted that it is “one of the few times” in his career where the fundamentals of Bitcoin have strengthened to such a high level, yet the price is lagging behind the fundamental factors. The analyst drew a comparison between mid-2016, when the price of Bitcoin climbed from around $1,000 to $20,000 in December 2017 across major exchanges.
The number of whales accumulating Bitcoin has also rapidly increased in the same period, data from Glassnode shows. Whales are individual investors that hold significant amounts of Bitcoin. Glassnode describes addresses that hold over 1,000 BTC, which is equivalent to $11.4 million, as whales.
The analysts at Glassnode said that the trend of an increasing number of whales indicates that high-net-worth investors are expecting the price of Bitcoin to appreciate.
Positive High Time Frame Technical Structure
Alongside the positive fundamental data shown by on-chain indicators, the technical structure of Bitcoin at a higher time frame depicts a resilient uptrend. From August to October, Bitcoin has stayed above the $10,500 support level for the majority of the time.
Technically, $10,500 is considered a support area because it marked the October 2019 peak. When the price of an asset consolidates above a previous top, in technical analysis it is considered a positive accumulation trend.
Traders often consider the weekly and monthly candle charts as high-time-frame charts. On a weekly candle chart, each candle represents one week’s worth of trading. The past three weekly candles all closed above the $10,500 support level, which shows a positive technical structure.
Peter Brandt, a long time futures trader, noted that the weekly chart indicates a highly encouraging trend. The trader also emphasized that the strengthening momentum of Bitcoin coincides with a high profile investment into Bitcoin by the $82 billion payments conglomerate Square.
“It is a major development that a global corporation is now putting BTC onto its balance sheet. The weekly and daily charts [are] poised to flash a big buy signal,” Brandt said.
In a technical sense, a steep drop below the $10,500 support area, which has held up strongly throughout the past two months, has become unlikely as a result of the recent Bitcoin rally. The confluence of the optimistic on-chain indicators and a favorable technical structure is likely shifting the sentiment among traders from cautious to neutral.
Trading Activity Trends Look Good
Data from Skew shows that open interest of the Bitcoin futures market has remained relatively stagnant. In the spot market, the volume of institution-tailored platforms, including LMAX Digital and Bakkt, has stayed high.
When the futures market leads the Bitcoin market and causes the price of Bitcoin to spike, it leaves Bitcoin vulnerable to a potentially sharp pullback. That is because trades in the futures market are highly-leveraged since traders borrow capital to bet against or for Bitcoin. As such, if the price of Bitcoin sees a large price movement, it causes short or long contracts to become liquidated, amplifying both uptrends and downtrends.
However, since September 14, aggregated open interest of the Bitcoin futures market has remained in between $3.6 billion to $4.2 billion. The volume of the futures market has also not increased substantially since early October, despite the expiration of CME futures contracts in the last week of September.
The combination of a stagnant futures market, a steadily growing spot market, and the consistently high volume of institution-focused platforms signify that a large portion of the buying demand is coming from institutions and retail investors in the spot market. Theoretically, given that the spot market uses no leverage or borrowed capital, that should result in a less volatile and a more stable uptrend in the upcoming months.