Cryptocurrency Market:why Low Volume May Further Extend Bearish Trends

The flagship cryptocurrency continues to hold above the $42k print from early December. There was a move at the weekend that sent shockwaves across the globe.

However, since then, Bitcoin prices have been unable to hold above their $52k level, and a pattern of repeated support around the $45k has emerged multiple times over recent weeks.

Similarly, the marginal response to that support has been diminishing over time. The $52k level was retested before the Christmas holidays.

The bounces have grown more and more shallow after price action retreated quickly back to support, indicating that bulls are losing steam and may soon be unable to defend support. At the moment, we are seeing a descending triangle and bearish breakdowns are often anticipated.

There is a “tremendous amount of institutional demand on the sidelines” according to the Crypto Fear & Greed index, which has been dialled down to 15.

Some investors are proclaiming that there could be an extended bear market ahead, triggered by low volume.

Bloomberg commodity strategist, Mike McGlone says stimulus reductions tend to be negative for risk assets such as stocks and crypto assets but he believes at such a scenario, Bitcoin could outperform other currencies:

“The riskiest and most speculative investments are crypto assets. When risk assets decline, inflation is reduced. Bitcoin may be a primary beneficiary from such a scenario since it becomes a global reserve asset,” he said.

Despite a modestly bullish undertone in supply dynamics, on-chain metrics show a general lack of activity. In the meantime, illiquid coins are migrating en masse into dormant wallets, and investor profitability and cyclical metrics are more bearish.

We expect continued sideways consolidation into 2022 with both bull and bear signals present.

Also, the number of non-zero addresses at 39.6 million is 40% higher than the peak set at the end of the 2017 bull market, indicating that the number of users has continued to grow over the past five years.

As we can see from the daily activity graph, the number of active on-chain entities has finally broken over 275k per day. A ‘bear market channel’ can be observed in red on the chart below. There is a persistent rise in network users even when prices are low and relative interest is low.

Given Bitcoin’s parabolic nature, it is impossible to tell if it will hold or break upon its next test. This is an inflexion point and should be regarded as such. If sellers succeed on that next test, the door to deeper breakdowns can quickly open.