Bitcoin’s Brush With Oversold Levels Suggests Selloff May Be Over – For Now
Bitcoin’s epic collapse culminated on Thursday with a price-per-coin of around $6,130, prompting an imminent reversal. Though possibly short-lived, bitcoin’s bounce can be attributed to one of its worst RSI readings in almost two years.
Bitcoin Price Update
The value of bitcoin plunged toward $6,100, its lowest in two months, as volatile futures activity and a dearth of new buyers extended the gut-wrenching decline. With the fall, bitcoin’s relative strength index (RSI) crashed below 30 in one of the more convincing signs of oversold conditions.
Barchart’s modified RSI of bitcoin fell into the 20s late Wednesday, prompting an immediate rebound. Prices were last seen trading around $6,400 after hitting a high of $6,547.19.
Even with the modest recovery attempt, bitcoin values are down more than 16% over the past five days. The coin’s trading volumes have risen to around $5.2 billion for the day, compared with a broader market turnover of just $16.6 billion.
At current prices, bitcoin has a total market capitalization of $110.5 billion, which is slightly lower than the April Fool’s bottom.
Bitcoin Futures Fueling the Decline
To understand bitcoin’s recent volatility, one has to observe the futures market, which has introduced both opportunity and chaos to the world’s largest crypto asset.
Volatility around CBOE and CME futures expirations has been flagged by Thomas Lee as a potential factor for bitcoin’s recent slide. In a report issued on Thursday, Lee utilized Justin Saslaw’s theory that BTC/USD tends to fall into expiration. Since the futures contracts were launched, there have been six expirations, including one on June 13.
According to Lee, traders tend to long bitcoin and short the futures contract. With this setup in place, holders could sell a bigger share of their coins at a volume weighted average price to reduce tracking error. During expiration, they may sell the remaining bitcoin, thus triggering a price collapse. When this occurs, their short position in the futures contract finishes with a solid profit.
As we’ve noted before, the influx of new traders into crypto has dwindled significantly in recent months. A greater net supply of bitcoin and other cryptocurrencies partly explains the market’s massive slump from its January peak.
Firms like Coinbase are betting on traditional capital driving the next leg of the bull market, but institutional tools are presently limited. Although Goldman Sachs and several others are entering crypto, it may be a while still before new capital flows emerge.
Disclaimer: The author owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.
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