Bitcoin’s RSI Indicates a Bottom but Macro Factors Remain Uncertain
Amid the biggest market crash in years, the Fear & Greed Index is steadily inching to a new low. The last super bottom was in August 2019 at 5 points, while it is presently holding at extreme fear of 8. With hyper anxiety fully entrenched, can investors rely on on-chain data to tell them something useful?
Bitcoin and Ethereum are Oversold Based on their RSI
In a non-chaotic market environment, the Relative Strength Index (RSI) is typically a go-to tool for measuring where the price of an asset should be. RSI visualizes whether something is oversold or overbought based on the momentum of previous price shifts.
Zooming out to a five-year span to get a clearer picture, Bitcoin’s present weekly RSI is even lower since the steep bear market in December 2018. Likewise for Ethereum, at well under 30 RSI, which indicates high overselling.
For investors, this usually translates to a buying opportunity. Moreover, Bitcoin’s illiquid supply has increased to record highs at the end of May. Meaning that more bitcoins than ever have been moved from exchanges to private wallets. This indicates whale accumulation and consolidation as they create a supply crunch for future demand.
With that said, as Bitcoin hit the $22.5k price range, less than half of Bitcoin holders are now in profit, at 47%. Simultaneously, long-term holders (strong hands holding BTC over one year) still make the majority of Bitcoin owners at 61%.
However, the fact that Bitcoin’s price was not defended at either $30k or $25k, tells us that on-chain data is of little help in a fearful market created by chaotic macro conditions.
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Federal Reserve’s Incoming Interest Rate Hike
All indicators rely on past performance data. Meaning, that indicators rely on the observed system to be rational as it exhibits some level of periodicity. Unfortunately, the last two years have been full of anomalies that disrupt such modeling.
- Response to a global pandemic with measures never before used.
- On top of lockdowns that are now widely recognized as deleterious to both public health and the economy, they also created a dislocation of the global just-in-time (JIT) supply chain.
- This was further exacerbated by the response to the Russia-Ukraine conflict. It had the opposite effect of what was publicly pushed – just like the lockdowns for the purported health event.
Central banks aggravated the situation created by this anomalous series of events. The Federal Reserve increased its balance sheet from $3.9 trillion to $8.5 trillion. Simply put, the Fed diluted the value of the dollar as it flooded the economy with cheap money at near-zero interest rates.
By doing so, it was baked into the monetary cake that the dollar would become less valuable. Effectively, the Fed’s intervention triggered a 40-year high inflation rate. Another way to describe it would be charging an interest rate for something that is “digitally printed”.
As the Consumer Price Index (CPI) inched closer to double-digit territory, Fed Chair Jerome Powell even called for wage suppression to moderate labor demand in an attempt to cool down the economy. However, the most powerful tool at the Fed’s disposal is raising interest rates by reversing quantitative easing (QE) with quantitative tightening (QT).
At the upcoming FOMC meeting on Wednesday, a new interest rate hike is on the table, up as much as 75 basis points (0.75%). With this scenario unfolding, all market assets are going down, dragging down corporations wedded to them.
After all, what was inflated by cheap capital is equally deflated by the rise in the cost of capital. Unfortunately, deflating the inflated also risks recession. This is especially likely in an economy where inflation is eating up wages.
The lowest personal savings rate in 14 years, at 4.4%, clearly indicates this daily struggle. For this reason alone, defending the price of digital assets becomes more questionable than in previous periods.
Do you think Bitcoin has become correlated to traditional markets, to a fault? Let us know in the comments below.