Stellar Week for Bitcoin, Altcoins Ends in Ruin

After setting consecutive yearly highs, bitcoin (BTC) and its altcoin peers crashed suddenly Thursday evening, raising the specter of a much deeper correction in the very near future. Downside momentum appears to be getting stronger, providing investors with a hefty dose of reality following the parabolic surge of the last month or so.

There was no immediate catalyst for the nosedive Thursday evening, leading us to conclude that the market has entered a natural correction from overwhelmingly overbought levels. This idea is backed by technical indicators like the RSI, MFI and NVT, all of which were extremely overextended.

Crypto Markets Plunge

After sustained pressure to the north for most of the week, crypto markets declined sharply late Thursday. Bitcoin crashed below $7,000, wiping out more than $1,000 in prior gains. According to TradingView data, BTC bottomed at $6,178.00 on Bitstamp before quickly recovering above the $7,000 handle.

At last check, bitcoin was trading north of $7,200 on most major exchanges. Aggregate pricing data from the CoinMarketCap data feed showed an average price of around $7,283.

It’s definitely not all gloom and doom for bitcoin. As the following chart illustrates, the largest cryptocurrency is still trading well above the 200-day moving average and the accumulation/distribution line implies far more buyers than sellers. The good news is the relative strength index has corrected sharply from extreme overbought levels.

Bitcoin price
Bitcoin experiences a sudden flash crash on Thursday but quickly recovers the $7,000 handle. | Source: TradingView

Despite the sudden reversal, bitcoin is still up more than 15% this week, underscoring the intensity of the previous rally.

The large-cap cryptocurrencies all returned more than 11% over the past week despite plummeting in lockstep with bitcoin just a few hours ago. Among the majors, the biggest weekly gainers were Ethereum (ETH), Binance Coin (BNB) and Stellar (XLM). Tezos (XTZ) was the biggest percentage gainer within the top 20, surging more than 45%.

Crypto carnage fails to reverse weekly gains for the majors. | Source: CoinMarketCap

Dangerous Indicators Align

A crypto analyst by the name of @throwaway caused quite the stir earlier this week when they showed the extent to which bitcoin was overbought. In a Tuesday tweet, the analyst said: “This is only the 4th time in BTC history in which weekly RSI, MFI, and NVT have all been simultaneously overextended. The previous 3 instances were followed by 82%, 85%, and 83% drops, respectively.”

Basically, he’s saying that the technical indicators point to an 80% drop in bitcoin’s price from Tuesday’s level. A correction of this sort would sent bitcoin crashing well below $2,000.

MFI stands for Money Flow Index, which is an oscillator that relies on price and volume to measure buying and selling momentum. NVT stands for Network Value to Transactions Ratio, which helps investors assign value to crypto prices.

Predicting bitcoin’s future is notoriously difficult and there’s no proof that the overbought alignments of the RSI, MFI and NVT will result in an 80% crash. But these indicators do confirm what we’ve known for the past few weeks – that bitcoin is extremely overbought. You only needed the RSI to confirm that.

Adoption Race Heats Up

The sudden flash crash in cryptocurrencies came on the heels of major developments around institutional adoption and merchant acceptance of digital assets.

Earlier this week, the CEO of Intercontinental Exchange’s Bakkt futures platform confirmed that the new product will finally receive testing in July, roughly seven months after its planned launch date. Despite the delays, Bakkt is developing physically-settled bitcoin futures contract under the direct supervision of the Commodity Futures Trading Commission (CFTC). When the product clears its testing phase, investors can feel assured that they are accessing a secure and highly regulated asset.

A senior employee at Microsoft AZURE has also confirmed that the software giant is building a decentralized identity (DID) network on top of the bitcoin blockchain, offering yet another use case for the largest distributed ledger.

Grayscale Investments also released new data showing significant institutional uptake of its Bitcoin Trust. As of May 13, the Grayscale Bitcoin Trust (GBTC) had $1.7 billion in assets under management.

Forbes also announced this week that several major retailers will soon begin accepting cryptocurrency payments. The names mentioned include Starbucks, Amazon-owned Whole Foods and Nordstrom. The companies themselves have yet to confirm the story, although Starbucks is already part of the Bakkt initiative.

The Week Ahead and Things to Consider

Over the past few weeks, Hacked has repeatedly warned traders to expect a sharp correction in the price of bitcoin and other leading cryptocurrencies. Those warnings came to fruition mere hours ago as the market pulled back sharply from more than six-month highs. Long-term investors shouldn’t panic, as large shakeouts are widely expected and completely normal regardless of the market cycle.

Heading into next week, crypto assets can go one of three ways: extend the slide, consolidate in a narrow range or resume higher. Since bitcoin remains in heavy accumulation, there’s some evidence to suggest that the market could see a quick recovery. On the flip side, BTC and the rest of its altcoin peers were extremely overbought during the latest rally. Traders may not be so willing to relive that.

In either case, crypto adoption is spreading and the market has turned a definitive corner since the start of the year. In this environment, avoiding panic will be the key to success.

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.

Featured image courtesy of Shutterstock. Charts via CoinMarketCap and TradingView.

Chief Editor to and Contributor to, Sam Bourgi has spent the past nine years focused on economics, markets and cryptocurrencies. His work has been featured in and cited by some of the world's leading newscasts, including Barron's, CBOE and Forbes. Avid crypto watchers and those with a libertarian persuasion can follow him on twitter at @hsbourgi