Bitcoin: Something Big Is Brewing (BTC-USD)

Summary of the assignment

Bitcoin (BTC-USD) has barely moved in recent weeks. However, historical evidence suggests we could see some wild price swings this week. This can come in the form of a rally, a final capitulation event, or even an impulsive one rally that suggests the bottom is in.

Something big brews

Bitcoin has been dormant for the past few months. The coin has had reduced volatility, and the price has been almost flat. In fact, Bitcoin has outperformed the broader market since the bottom in June. While the market S&P has made new lows, Bitcoin has held support.

Sentiment is at record lows for both cryptos and stocks, and this could mean the bottom is near, which will be confirmed with a strong reversal. But there is also a chance that we will get a final shakedown.

Regardless, Bitcoin appears to be approaching a major move, and this is supported by history. Below we can see the Bitcoin price and the Bitcoin Volatility Index since 2018.

As we can see in the chart, when volatility has reached such low levels in the past, it has often been followed by a large movement in price. In October 2018, we had a selloff that took Bitcoin below $3,000. A similar thing happened in the 2020 COVID crash.

On the other hand, we have also seen periods of low volatility set us up for big moves to the upside, which is what happened in late 2020.

It looks like this could be an important week for Bitcoin, but are we selling off or taking off?

Break-out or break-down?

I’ll put it simply. At the moment, I think we should see Bitcoin break down and make a lower low. This is mostly based on Fibonacci extensions and my current Elliott wave number. But many analysts also point to this chart as evidence that a breakdown is imminent:

We can understand that Bitcoin is forming a very similar structure today, as it did in the 2018 selloff. We have a triangle forming and volatility is reaching a similar level as it did in 2018. If history repeats itself, Bitcoin will break down when it hits the top of the triangle.

And where will the price land? A key support area is the Delta price, which is currently around $13,500.

Now let’s zoom in on the current price action to take a closer look at what’s going on:

Since around March 22, Bitcoin has completed a five-wave structure to complete a major degree correction. The most likely scenario is that the low we made in June was the low of wave 3, and we are now either ending wave 4, ending wave 5, or starting the first wave of the bull cycle.

If we end wave 4, Bitcoin can now rise as far as $27,782, which is the 50% retracement of wave 3. This would actually mean that Bitcoin is in line for a big move, but I still expect a crash after that.

Alternatively, wave 4 may have already peaked at the end of August, which is marked on the chart as wave W. We can then argue that we complete five waves for a final wave 5 bottom, which puts us now in wave 3 This means that we may see an aggressive selloff, typical of a wave 3, taking us towards the $14,200 region. This is 1.618 ext of the red wave 1 measured from the top of wave 2. The implication of this is that we would bottom somewhere around this area, but perhaps even as low as $12,000. This would be invalidated if we rally above wave 2 high.

Finally, a case can be made that five waves have already been completed and we are ready for a reversal. However, this is the least likely scenario since it would mean we have a truncated wave 5 bottom, meaning that wave 5 did not make a lower low, which is unusual.

That said, we saw a strong reversal on Thursday. If we can now hold the $18,500 level and rise sharply above $20,000, this scenario will gain some more probabilities.

Final thoughts

Whatever comes next, I think we are due for some increase in volatility and wild price swings. We should get a lower low in Bitcoin, but I also have to entertain the possibility that the low is in. Although the Bitcoin chart does not suggest this, I am getting some evidence of a bottom in other charts, such as Ethereum (ETH-USD) and the S&P 500 (SPY). I also see the dollar index (UDN) near the top, which should trigger a rally in crypto.