Deciphering When To Buy And Sell Your Bitcoin

Overview

Bitcoin prices have been on a tear over the past month, rallying 60% to set a new all-time high above $72,000 as the cryptocurrency benefits from billions of dollars in flows into spot-based exchange-traded funds and anticipation surrounding the upcoming halving.

Crypto is clearly in another bull run, but making this judgment is usually complex given bitcoin’s natural volatility, as is identifying when they are starting to stall. Investors must understand a bull market’s core components and indicators to make informed portfolio decisions throughout market cycles.

Most analysts define a bull market for stocks as a 20% increase from a recent low, which can be measured by tracking the progress of a single stock or a primary index like the S&P 500. For instance, equities are also in a bull run right now—despite consistently stubborn inflation—because the S&P 500 is up about 24% from its recent low in October 2023.

The situation with bitcoin is more complicated. The digital currency has a history of significant volatility and frequently experiences 20% gains and losses. In the last 12 months, bitcoin surged more than 20% at least three times and dropped by more than 20% on four occasions. This erratic behavior is not helpful for investors looking to make long-term directional plays.

Therefore, several other variables, such as trading volume, the derivatives market, market sentiment, and critical support and resistance levels, must be considered before declaring a bull or bear market in crypto.

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Key Background

The easiest place to begin is by determining a price movement threshold that would constitute a new market trend. The 20% benchmark traditional industry uses needs to be increased. To apply this metric to crypto, it is necessary to consider its comparatively high volatility relative to traditional assets.

Joshua de Vos, research lead at CCData, looked at the 30-day rolling annualized volatility of the cryptocurrency and the S&P 500 index going back to 2010, calculating a ratio for each year. While this figure has decreased, bitcoin was roughly 3.3 times more volatile than the S&P 500 over the last few years (2022, 2023 and the start of 2024).

The table below illustrates these changes, specifically comparing bitcoin price data from Bitstamp to the benchmark index:

With this ratio, de Vos estimates that a 66% increase in bitcoin would indicate a possible bull run. Going back to the most recent chart, by this metric, it would mean that the only bitcoin bull run in 2023 would have started in August, which coincides with a landmark ruling by the Washington, D.C Circuit Court of Appeals vacating a rejection of a bitcoin exchange-traded fund (ETF) application from the SEC. However, confirming a bull market still requires reviewing other factors.

Key Statistic

Another area that can be analyzed is the derivatives market. During bullish periods, optimistic investors tend to use futures contracts as tools to bet on further price increases, oftentimes with leverage to stretch out gains. The challenge here is identifying shifts in the behavior of derivatives traders before a directional shift in the underlying asset price.

A key finding in derivatives data during the fall of 2023 signaled an impending bull run. Between roughly the end of September 2023 (9.27.23) and the end of October 2023 (10.24.23), the open interest on bitcoin options on Deribit, measured in U.S. dollars, increased by more than 100%, rising from approximately $6.45 billion to $13.96 billion. Open interest is defined as the total value of unsettled futures contracts.

Now, as discussed earlier, the bull run started in August, but it accelerated in October when the SEC declined to appeal the DC Appellate court’s decision regarding its decision on Grayscale’s ETF application. It then accelerated again in February 2024 right before bitcoin’s surge above $70,000 for the first time. Therefore, sometimes, there can be accelerations in momentum during bull runs, which is evidenced here. The key metric is a 100% surge in open interest.

The chart below displays this activity. A link can be found here.

Trading Volume

Another key variable is trading volume, specifically identifying changes in activity that would indicate a new market cycle. However, this metric requires some nuance. De Vos looked at specific activity in 2019 and 2020 to show what shifts could signal the start of a bull market.

“In the first quarter of 2019, the crypto market experienced its lowest average quarterly volume since the third quarter of 2017,” he stated, citing figures from CCData. He singled this out as a “significant bottom,” after which bitcoin formed a bullish market structure.

“A notable observation during this time was the substantial increase in quarter-over-quarter volume from Q1 to Q2 2019. This increase in volume was sustained well above the levels recorded in Q1, signaling growing market interest and potentially the start of a bullish trend,” he continued.

De Vos noted, citing figures from CCData, which sources data from roughly the 100 top exchanges, that volume rose by nearly 150% from roughly $250 billion to $623 billion between Q1 and Q2 2019.

The following quarter, trading volume dropped roughly 14% to $537 billion, and then it declined another 19% to $434 billion in the subsequent period. This metric may have decreased because the Q2 2019 surge represented an overreaction, and some price consolidation occurred afterward. This again shows why evaluating many factors in making such a determination is necessary. The chart below illustrates these developments:

He noted that near mid-March 2020, bitcoin plummeted over 50% in 24 hours. This point represented another market bottom, and in April and June 2020, spot trading volumes increased significantly. “This period saw consecutive price increases, which, combined with the increased volumes, instilled a bullish sentiment in the market,” de Vos claimed.

Another potentially helpful way to examine trading volume for bull market signals is by examining its moving averages. Moving averages smooth out data volatility by averaging values looking back in time. The chart below compares bitcoin’s price with a relatively low 7-day simple moving average (SMA). Although the pattern does not always fit, clear surges of more than 50% in the 7-day SMA in the spring of 2020 and January 2023 predicted bull runs.

But a word of caution: increased trading volume does not always equate to bull runs. Sometimes, the opposite can be true. For instance, there was also a surge in July 2022, but that volume rush was more due to a sell-off during the bearish end of 2022.

An even better indicator may be a surge in trading volume that occurs without a commensurate increase in bitcoin balances on an exchange (a leading indicator of the intention to sell). As you can see in the bottom chart, the spikes in the spring of 2020 and January 2023 coincided with the amount of bitcoin on exchanges either decreasing or staying the same. This matters because it signals that growing buying pressure for the asset is not met with an increase in supply from willing sellers.

Bullish Technicals In 2023

Aside from these indicators, technical analysis of bitcoin price charts can also help detect bull markets. There is evidence that a bitcoin bull structure was beginning in March 2023, according to CCData’s de Vos. To illustrate this development, he provided a chart depicting bitcoin’s price movements from May 2022 until now:

“Analyzing the chart, the horizontal line indicates the price level which needs to be exceeded for a bullish market structure break to be confirmed (set in August 2022),” he stated. The expert tied the aforementioned market structure to the suggested 66% price increase, stating that “Based on the chart provided, a 66% move from the bottom would put BTC at ~ $ $25,600, which coincidentally serves as a price level just above the bullish market structure break (~$ $24200).”

“Utilizing the threshold provided of 66%, Bitcoin would have confirmed ‘bull market’ status upon the exact weekly candle where a bullish market structure break was confirmed (w/c 13 March 2023), if we consider a bull market to be characterized by price action alone,” he noted.

De Vos offered further background context, examining key technical levels.

“During the Silicon Valley Bank crisis in March 2023, bitcoin broke out of a multi-month consolidation, achieving its highest price since August 2022. By breaking above that previous resistance and retesting it as support, bitcoin’s bullish market structure was confirmed, maintaining higher lows and higher highs throughout 2023,” said de Vos.

Outlook and Implications

Based on the factors outlined above, it is clear that bitcoin is in a bull market right now. A natural question to then ask is how long the market will continue. Each one ends differently, and its closure can come from several factors. For instance, a major catalyst for the collapse of the 2017 bull run was the creation of bitcoin futures, which let professional investors short the asset for the first time. The 2022 bear market was rooted in rapid monetary tightening from the Federal Reserve and other central banks around the world to rein in the highest levels of inflation in decades. But those bull runs lasted between 1-1.5 years. The market is currently in about an eight-month surge, and there are reasons to expect it to continue.

The upcoming bitcoin halving, a once-every-four-year event, will shrink bitcoin’s rate of new supply by 50%. This reduction, combined with further expectations of asset manager inflows into the bitcoin ETFs and growing expectations for a soft landing of the economy will likely extend this bull run. There will still be volatility, but the longer-term trend should stay intact for some time.

Decision Points

Investors looking to invest in bitcoin have a variety of options. Direct bitcoin exposure can be gained from purchasing it on the spot market from an exchange like Coinbase or Kraken, but the fees are higher than investing in one of the new ETFs offered from firms like BlackRock, Fidelity, WisdomTree, Invesco and VanEck. On the equity side, software company MicroStrategy (MSTR) is the best pure-play crypto stock because of its large leveraged holding of the digital asset. Bitcoin miners have served as proxies in the past, but they are underperforming bitcoin due to concerns about how the halving will impact their profitability post-April. Coinbase is appealing as a more diversified way to get exposure to the industry, as it offers a wide variety of services beyond just offering brokerage services.