Bitcoin: Expect The Unexpected, And Buy Accordingly (BTC-USD)

Thesis Summary

Bitcoin (BTC-USD) went as low as $33,000 yesterday, shedding over 50% from its all-time high. This has prompted many crypto pundits and analysts to call for the beginning of the crypto winter, which would imply a prolonged bear market. However, with everyone expecting one thing, it is more likely the market will do just the opposite. I expect that Bitcoin and other cryptos will find a bottom sooner rather than later. I offer my long-term view based on Elliott Wave Theory and my 2 cents on how to trade/invest accordingly.

The Big Picture

During a drawdown like this, the best thing you can do for your wallet, and mental health, is to look at the big picture. With that said, here is my big-picture outlook for Bitcoin using Elliott Wave Theory (“EWT”).

EWT is a school of technical analysis that postulates that the market moves in waves. 5 waves in the direction of the trend, and 3 waves counter to the trend. Each wave is then in itself made up of smaller waves, so you could say they are fractal. Using Fibonacci ratios we can also get a good idea of where the next waves are going to “land”.

Above we have a very simplistic analysis of Bitcoin’s most recent bull market, starting following the COVID crash. That first run up to $60,000 could be considered wave 1, and what we have seen since is a correction take place in a wave 2, following an A-B-C pattern.

While I don’t think we have bottomed yet, we could indeed be quite close to doing so, somewhere a bit below the low we hit on Monday. The 0.382 retracements of wave 1 would land us around $27,000. Alternatively, we could assume that A will be equal to C in length.

Zooming in a little bit, we can make out a five-wave structure forming within this C wave down. Monday could have been the bottom of wave 3, which would mean a retrace now in wave 4, somewhere near $40,000 perhaps, and then a final extension to the downside in wave 5. Wave 5 typically extends 1.618 from the start of wave 1 through the end of wave 3, which would land us near $20,000. However, since we have quite an extended wave 3, we could also see a wave 5 equal to wave 1, which depending on where wave 4 lands, might get us closer to $25,000-27,000.

In any case, a bottom could be forming quite soon. Following the larger picture, the next wave up could take us close to $100,000.

Expect the Unexpected

We must put things into perspective, and not trade based on emotions. I can understand the instinctive urge to sell, I got it yesterday near the low. But where would I be now if I had? Probably wondering if I had just sold at the bottom and looking to buy in again due to FOMO.

Alternatively, I could assume that my EWT analysis is flawless, and sell at $40,000 to rebuy lower. But what if I am wrong? EWT is only one of many tools I use to analyze Bitcoin, and it is far from perfect. EWT has its limitations, and while I think markets do have a way of following these trends and Fibonacci extensions in the long term, it can get a lot messier once we zoom in.

Lastly, I still hold my expectation that we will bottom soon and rally hard. For one thing, I don’t believe we are yet close enough to the bear part of this cycle, with still a few months to get us through that halfway point between halvings.

Most importantly, though, everyone in this space is expecting a “crypto winter”. When has trading been this easy? It is a common thing for humans, and therefore investors, to fall victim to recency bias. In other words, we believe that what has happened most recently will happen again. We tend to overestimate the importance of the present and disregard the lessons of the past.

Everyone is most bullish at the top and bearish at the bottom. Talk of a bear market has ramped up for both crypto and the stock market.

As we can see, market sentiment is in the gutter, and this is usually an indication that a bottom is near.

Conclusion

Trading Bitcoin is easy, at least in a long enough timeframe. At this point, most people believe that it will come back around, it is just a matter of when. However, it is this realization that will have many doubling down at near $30,000 and $20,000, which will contribute towards establishing a bottom soon. Many will also be selling, falling victim to their emotions. This is the time when money is made, so have a clear plan of action and follow it.

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