Bitcoin spiked to $109,936 on January 20th – Donald Trump’s inauguration day – before dumping 28.5% to close February at $78,220. The new US presidency, with its pro-crypto stance, was supposed to be bullish for the bitcoin price. Except it wasn’t. It was a classic bull trap, and it crushed late buyers.
Here’s how bull traps work, why they happen, and how not to get snared by the next one.
What’s a bull trap?
A bull trap is just what it sounds like: a price move that, err, traps bullish buyers. First, the price rockets higher (generally on positive news), which gets the whole market really excited. Late buyers soon feel the FOMO as prices jump, and they start buying en masse. Then, as if “out of the blue”, the price drops hard and fast – trapping those late buyers in losing positions. The bitcoin chart below shows the latest example of this playing out, to an absolute tee.
The bitcoin bull trap 2025. Chart made with TradingView. Source: Finimize.
There was another bull trap in January of last year. One day after BlackRock et al launched nine spot bitcoin ETFs, bitcoin’s price spiked to $48,965 – and then sank 21.3% over the next two weeks. Yes, the price has more than doubled since those ETFs began trading, but that double-digit percentage drop still would have burned. Anyone who bought near the spike would have been deep underwater – at least for a while – and might’ve even sold at a loss.
The bitcoin ETFs launch bull trap of January 2024. Chart made with TradingView. Source: Finimize.
Sometimes, though, bitcoin’s bull traps can be far more lethal – and they don’t always need a major news catalyst to set them off. In November 2021, for example, bitcoin broke above its April high (white) – which got everyone (including me) super bullish – and then topped out for the cycle. The price drifted from $68,998 to $15,479 in a brutal bear market.
A bigger bull trap occurred in November of 2021. Chart made with TradingView. Source: Finimize.
How do you spot a bitcoin bull trap?
The whole point of a bull trap is that it’s designed to trick you – and that makes them hard to spot. But here’s where some good old-fashioned technical analysis can help – specifically, Bollinger Bands. If you’ve read our Bollinger Bands guide, you’ll know that the bands measure the volatility of an investment: the wider they get, the bigger the price swings. And when the price starts trading above the top Bollinger Band, you can consider it a relatively “extreme” upward move.
Sometimes, those extreme upward moves can sustain themselves for a while – and you’ll see bitcoin rally violently. But if you see bitcoin’s price briefly spike high above the top Bollinger Band, and then close back below it shortly after, that’s usually a sign that the rally is unsustainable. That kind of price action should immediately set off your bull trap detector. It means investors bought loads of bitcoin to push the price higher – into extreme territory – but are now stuck in losing trades.
The chart below gives a zoomed-in view of how this panned out with the inauguration. It took a few days for the trap to play out, but once the top band started acting as resistance to the price (in other words, as a ceiling), that’s when it became clear that the upside momentum was losing steam.
The January 2025 bull trap with Bollinger Band analysis. Chart made with TradingView. Source: Finimize.
And here’s what the bitcoin ETF bull trap looked like when wrapped in Bollinger Bands…
The bitcoin ETFs launch bull trap with Bollinger Band analysis. Chart made with TradingView. Source: Finimize.
And, for completeness, here’s the November 2021 trap…
The November 2021 bitcoin bull trap with Bollinger Band analysis. Chart from TradingView.
So what’s the big lesson here?
Back in early 2023 – when bitcoin was trading near $25,000 a coin – I wrote this piece about avoiding bitcoin bear traps. My thesis then was that bitcoin’s price would go a lot higher, but there’d be plenty of bear traps along the way. These trapped late sellers – who sold bitcoin after quick downward moves and then missed out on further upside.
But the stakes are different now. Bitcoin is trading at much higher multiples, so there are, by definition, way more late buyers – meaning it’s time to be more mindful of bull traps. If you want to avoid them altogether, it’s pretty simple: don’t buy the rips – buy the dips instead.
Alternatively, consider a classic dollar-cost averaging strategy to gradually build a bitcoin position over time. The strategy tends to win in the long run – and I wrote about how that works here.
