The Bitcoin (BTC) frenzy is in full swing as the price continues to trade above $7,000 even though it closed the week below it. The number of margined longs keeps on rising on exchanges as analysts and industry leaders euphorically talk about the possibilities of a new bull run this year. Some expect the price to fly to $20,000 while others have even more bullish targets. The irony is that most of the bulls did not even expect this rally, but now that it has happened they are following along without thinking about what this could mean. BTC/USD broke straight through the $5,800-$6,000 resistance zone which was a very significant event that both the bulls and the bears shy away from discussing. The bulls don’t think it was a big deal that this support was broken and the bears do not want to admit it was a big deal because they do not want to think they were wrong.
Interestingly, recent developments have confirmed that BTC/USD is not following the 2015 part of the previous cycle because if it did, we might have seen a rejection at the previously broken market structure. So what part of the previous market cycle is BTC/USD following then? If we look at the weekly chart for Brave New Coin Liquid Index for Bitcoin, we can see something very interesting. During the previous market cycle, BTC/USD broke below the 61.8% fib extension level and then tested it as resistance in 2014. If we look at the current market cycle, we can see that BTC/USD faced a strong rejection at the 61.8% fib extension level as well. If we compare the two cycles, we can see that BTC/USD is following its previous market cycle in an extended way as it should because the succeeding cycle has to be longer than the preceding cycle.
The last time BTC/USD tested the 61.8% fib extension level, we saw the price decline massively until it capitulated and found its true bottom. That was more than a 65% move to the downside that inflicted maximum pain on investors. Now, if we look at the way things are this time. A lot of people are desperately buying Bitcoin (BTC) at these levels because they do not want to miss the next “bull run”. The Fear and Greed Index just reached a new all-time high today at 78 (extreme greed). What does this mean? This means that every time BTC/USD retraces now, people are going to buy the dip. All this dip buying is going to make the bears restless and give up while the bulls will become more confident. The daily chart for BTCUSDShorts shows how significantly the number of shorts has declined in the past few days.
The longs on the other hand are euphoric right now. Normally, BTCUSDLongs trades quite conservatively and we do not get to see long green candles like we do now. BTCUSDLongs is in a descending channel with a clear bearish divergence on the RSI but the bulls are not least bothered. In fact, as the price of Bitcoin (BTC) retraces in the near future, we will see the bulls buy back with more margin. The number of margined longs is going to keep on rising until it reaches a point where the bulls meet the same fate as the bears did just recently.
However, in case of the bulls it is going to be a lot worse as the price will have to fall hard to inflict maximum pain. When the bulls buy at these levels only to see the price decline to $1,800 or lower levels in the months ahead, most of them are going to give up. This will be the maximum pain scenario that we have been talking about in our previous analyses. Those that have been around during Bitcoin (BTC)’s 2014-15 cycle know what it is like when the price bottoms. The sentiment is a lot different than what we are seeing right now. It makes a lot more sense now as the whales have just extended the current market cycle while the majority expects a bull run by the end of the year. It doesn’t take much to see how this is going to end.