Bitcoin’s Price Soars But Technical Indicators Warn Asset is Overbought

Bitcoin is in uncharted territory. On November 1, the project’s price was bubbling around $14,000. Less than three months later, the price has tripled, and news outlets are falling over themselves to cover the price explosion. Why the sudden surge? There are a range of factors. 

The first and most salient is Elon Musk, or rather Tesla. In a recent filing released yesterday, the company announced it had acquired $1.5 billion worth of Bitcoin. 

That led to a 20% jump in Bitcoin’s price as the news was interpreted as a vindication that Bitcoin is an asset that big companies can get behind, leading to an 81% increase in trading volume over night.  

As the news ripples across the markets, the price is being sustained. But more broadly, Bitcoin’s meteoric rise owes a debt to the Federal Reserve’s continued propping up of the economy. As we’ve discussed many times in this column, 2020 saw the performance of Bitcoin and the S&P 500 begin to more closely resemble each other. That trend continues today. 

As Bitcoin has boomed, the Dow has had the best start to a February since 1931, closing up more than 200 points for the day. The S&P 500 and the Nasdaq are also up too. The Russell 2000 is on course for its best start to a February ever. These are not coincidental numbers. 

As new larger investors move into the cryptocurrency space, Bitcoin’s price starts to be more influenced by matters in the broader economy. 

There are several examples of this, that we’ve covered before: the chaos at the Capitol Building, the delayed stimulus bill, even Trump catching Covid all saw US stock markets and crypto prices act similarly.  

But while traditional assets are reacting to the US economy’s recovery, and the $1.9 trillion stimulus package passed by Joe Biden this week, analysts are starting to wonder how far Bitcoin’s price could go. 

Over on MarketMilk, the Relative Strength Index, Stochastic Oscillator, Williams %R, Bollinger Bands and Keltner Channel indicators - measures that all use historical price data to understand market sentiment - all suggest Bitcoin is severely overbought. 

These indicators have traditionally signalled a correction is on the cards. Investor Peter Brandt has suggested the market could collapse back down to $30,000. “The current parabola could correct back toward $30,000 without any damage to the market. The bull trend in 2015-2017 experienced nine corrections greater than 30%. The current market has reached just short of a single 30% correction,” he said on TradingView.

But these predictions all rely on Bitcoin’s history. The mania of 2017 that pushed the price of Bitcoin to $20,000, has been replaced by a hushed awe. No one really knows how high Bitcoin will go, but some investors it seems, are thinking about quitting while they’re still ahead.