Panic Mode? What a Wall Street Chart Tells Us About Bitcoin's Price

Investing in financial markets can be an emotional roller-coaster and the bitcoin market is no exception.

When it comes to investment, human emotions tend to oscillate between two extremes – fear and greed – and the constant balancing act between the two creates a cycle of market emotions.

For years, traders and investors alike have studied the cycle of market emotions with the help of a chart known as the “Wall Street Cheat Sheet.”

As seen above, at the top of the market cycle is “euphoria” – a point of maximum financial risk.

This is the time when investors think nothing can go wrong and a self-feeding cycle is established: more investors enter the market for its stellar returns, leading to a further rise in price and valuations reach dizzying heights before, eventually, reality bites hard.

The cryptocurrency market was gripped by euphoria in the last quarter of 2017. Bitcoin prices rose from $6,000 to $20,000 within seven weeks on speculation that futures launch would open floodgates for large institutions to buy cryptos.

Further, every other altcoin, regardless of its fundamental story, had rallied to record highs by the first week of January. Most pundits came out with bitcoin targets of $50,000 or more at the time.

The bubble, however, was pricked just two weeks into January by a regulatory crackdown in China and South Korea – two of the biggest sources of demand for cryptocurrencies back then.

Where are we now?

Since then, the bitcoin market has arguably gone through "complacency," "anxiety" and "denial."

In this interpretation, the denial stage, it could be argued, lasted for five months as BTC’s repeated defense of $6,000 offered hope that the broader market and altcoins with strong fundamentals would recover lost ground before the year-end.

Those hopes, however, were shattered as BTC nosedived below $6,000 on Nov. 14, pushing the bitcoin market into the “panic” stage, causing investors to look for an exit with no price floor in sight.

The price of bitcoin has since fallen nearly 50 percent from the $6,000 mark, trading at an average price of $3,327 according to CoinDesk data at press time. More importantly, trading volumes jumped more than 30 percent month-on-month in November. That high-volume sell-off likely indicates many weaker hands have left the market.

The argument for capitulation not having set in yet is that it is usually a single extreme selling event, short in duration but backed by a surge in sell volume and subsequent buy volume.

As recent as Nov. 1, bitcoin suffered just that and it seems panic is still the most likely candidate for bitcoin’s current stage in its market cycle, at least until a break below the psychological price level of $3,000 incites capitulation.

What’s next?

The result of capitulation is a lengthy period of sideways price action and misery felt by investors.

So this leaves us studying the market cycle after recent violent price drops, searching for visual cues of a “bottoming out” of the current bear trend.

And by having examined the different cycles it’s safe to assume bitcoin is close, but not quite there.

Weekly chart

The first stage after capitulation is ‘anger,’ when investors look for some reason for the horrific losses they’ve just experienced.

Finally, reality sets in for investors who then shift from feeling anger to "depression" in regards to the financial state they are left in and this is when the bottom hits.

When all hope in the market is lost in the eyes of the public, the market quietly starts to pick up a bid. At this stage, investors have been emotionally battered to the extent they will not believe any rally from here on out can be sustainable.

Although it may be hard to grasp, this point of what seems like utter disaster can be seen as the point of maximum financial opportunity and minimum risk. With all the sellers now out of the market, accumulation at basement prices can begin, which eventually provides the energy for the start of the next market cycle.

Like billionaire investor Warren Buffett famously said, be “fearful when others are greedy and greedy when others are fearful.”

Disclosure: The authors hold BTC, AST, REQ, OMG, FUEL, 1st, AMP and USDT at the time of writing.

Roller-coaster image via Shutterstock, cheat sheet via wallstreetcheatsheet.com, charts by Trading View