Analysts have been talking about a possible death cross on Bitcoin for a long time now. A death cross occurs when the 200 Day Moving Average crosses above the 50 Day Moving Average on the Daily Chart. Death cross is known for its devastating effects on the price of a stock. Most of the time, it pushes that particular stock or other financial asset in a bear market. In the case of Bitcoin, mainstream media picked it up and then most first time investors started to take it too seriously without realistically examining its specific implications in this case. This resulted in significant panic selling and also violation of some solid technical analysis. Most first time investors were even more concerned when they found that technical analysis even from top analysts on different forums was proven wrong over the course of just a few days.
The last time we were this close to a death cross was in late 2016. The 50 Day Moving Average (on top) came close to the 200 Day Moving Average (at bottom) indicating the possibility of a death cross. However, the death cross did not happen. The 50 Day Moving Average moved upwards and the 200 Day Moving Average continued downwards leading to the next bull run which pushed the price of Bitcoin to new highs. As usual, those who bought low and sold high profited enormously and those who sold low and bought high suffered losses.
This brings us to an important subject of market psychology, something which most first time investors often ignore. Technical analysis only works because it is backed by market psychology. People are so predictable in the way they think and feel. Professional investors are fully aware of that and most of the time, they use this to their advantage to manipulate the market and achieve their objectives and goals. It is worthwhile to note that there is no place for emotion in investing. The sooner one realizes that, the better.
However, the unfortunate reality is that majority of cryptocurrency investors are first time investors. They often do not have a sound knowledge of how the markets practically work so they end up losing money because they fall for very obvious traps set by ‘whales’ or market makers. This is exactly what happened in the case of this death cross. Most investors panic sold based on some hidden assumptions that they never said out loud. They thought the market is going to nosedive and the price is going to tank significantly which is why they were comfortable selling their coins at a loss. They did not realize that the whales or market makers knew exactly what mainstream investors were thinking, they always do. So, the whales refrained from buying, instead they sold some where they could at a profit and waited for the death cross to happen.
The time came and the death cross happened. Mainstream investors were left surprised to see the price did not nosedive after the death cross. Instead, it surged briefly but will likely consolidate over the next few weeks before the next possible bull run which could take BTC to its new highs for 2018. This recent episode highlights the importance of realistic expectations and proper understanding of market psychology. There was a time when tech geeks were the only ones to know about Bitcoin. Now, a lot of non tech investors hold Bitcoin and other cryptocurrencies. Next we will have institutions join the game. With the entry of each new player, there is a paradigm shift. The only way for investors to survive is to adapt.