Three Reasons Why Bitcoin Could Trend Upward From Here

Three Reasons Why Bitcoin Could Trend Upward From Here
Jonathan Hobbs

over 1 year ago4 mins

  • While bitcoin’s price might be volatile in the short-term, there are signs that suggest the worst of bitcoin’s bear market might be over.

  • Bitcoin is back above its 200-week moving average (for now), and the MVRV Z-Score suggests that now is just as good a time to buy bitcoin as it was at the bottom of any major bear market.

  • The crypto market overall is also recovering from a time of extreme fear, which is a good sign for the OG crypto.

While bitcoin’s price might be volatile in the short-term, there are signs that suggest the worst of bitcoin’s bear market might be over.

Bitcoin is back above its 200-week moving average (for now), and the MVRV Z-Score suggests that now is just as good a time to buy bitcoin as it was at the bottom of any major bear market.

The crypto market overall is also recovering from a time of extreme fear, which is a good sign for the OG crypto.

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Bitcoin has jumped 35% from its mid-June depths, and while there could be a short-term pullback, there are some good reasons to believe the tide is officially turning for the OG crypto…

1. It’s back above the all-important 200-week moving average.

The price of bitcoin did something in June that it’s only done a handful of times before: it broke below its 200-week moving average (MA). It then stayed there for a few weeks, before climbing back above it in July. The moving average (blue line) is the average price of bitcoin at the end of each week for the previous 200 weeks. Bitcoin briefly pierced below it during the Covid crash of March 2020, and it’s been a similar story with previous bear market bottoms.

Bitcoin price (red and green bars) and the 200-week moving average (blue line). Source: TradingView.
Bitcoin price (red and green bars) and the 200-week moving average (blue line). Source: TradingView.

It’s hard to say exactly why bitcoin has bottomed around the 200-week MA in the past, rather than dropping much further below it. But because it's happened before, investors see this as a key area for buying back into the OG crypto.

If bitcoin can manage to stay above that key level now, investors are likely to become more confident that its worst days are behind it, and be more inclined to buy. On the other hand, if bitcoin does finish a week below the 200-week MA in the next few weeks, it could lead to more downside in the price.

2. The MVRV Z-Score suggests bitcoin has bottomed.

Bitcoin doesn’t generate cash flows like stocks or bonds, which makes it impossible to value with traditional methods. But looking at public blockchain data, we can see that bitcoin is currently trading well below its “fair value”, at least according to one popular on-chain valuation model: the MVRV-Z Score.

The model uses blockchain data to compare two bitcoin values – the market value (gray line) and the realized value (green line).

Bitcoin market value (gray) vs bitcoin realized value (green). Source: Glassnode.
Bitcoin market value (gray) vs bitcoin realized value (green). Source: Glassnode.

The market value is simply the current bitcoin price times the total number of coins already mined. The realized value, meanwhile, sums up the latest cost of every bitcoin in circulation – that is, what each coin sold for the last time it moved to a different wallet. Bitcoin’s market value hasn’t fallen below its realized value all that often, but when it has, it’s signaled a major bottom in its price.

The MVRV Z-Score takes those two data points one step further, using some fancy math and statistics to get a Z-Score ranking. Essentially, this looks at the distance between the two values – by subtracting the realized value from the market value – and divides that number with bitcoin’s volatility (how much the market value moves around). It then discounts anomalies or extreme values to come up with a smoother chart for the Z-Score (orange line).

Bitcoin price (black) vs bitcoin MVRV Z-Score (orange). Source: Glassnode.
Bitcoin price (black) vs bitcoin MVRV Z-Score (orange). Source: Glassnode.

Bottom line: if you’d bought bitcoin when the Z-Score was in the green shaded area in the past, you’d have got in at bargain-basement prices – near the lows of each bear market.

3. Investor sentiment is lifting.

Bear market lows are usually born in extreme panic, and we’ve certainly seen that in crypto. The crypto fear and greed index (gray line) – which gives a sentiment score for how fearful (closer to zero) or how greedy (closer to 100) investors are at given a point in time – looks a lot like it did after the Covid crash of March 2020 and the bear market low of December 2018. It shows that investors have been extremely fearful for a long time, but have now become more greedy as crypto prices have begun to recover.

Crypto Fear and Greed Index. Source: Alternative.me
Crypto Fear and Greed Index. Source: Alternative.me

Looking at recent news events, we’ve also seen what you’d usually expect in a bottoming market. First came some major liquidation events that sent the crypto market into a tailspin. Among the highlights: Terra Luna, formerly a top 10 blockchain, imploded in May. That kicked off a domino effect that led to bankruptcy for Celsius Network, Voyager Digital, and others. And more recently, Three Arrows Capital collapsed – it was once one of the biggest and most profitable crypto funds around.

Then came a major good news catalyst that could help swing that sentiment around. BlackRock – i.e. the world’s largest asset management company – partnered with Coinbase last week to make it easy for institutional investors to seamlessly buy, store, and trade bitcoin in their portfolios. Not only is that a big stamp of approval for the digital asset, but it’s a big check mark for institutions looking to get bitcoin past their compliance departments.

So is this a good time to buy bitcoin?

It’s impossible to know for sure what bitcoin will do next. But if you’re thinking longer term, bitcoin could be worth the risk at these prices. Remember, there are ways to manage risk when investing in bitcoin and other volatile assets that can cushion the blow if the latest rally gives way to another selloff. You can hold bitcoin as a smaller percentage of your overall portfolio, mixing it in with other investments like stocks, bonds, and gold. You can also buy in incrementally – rather than all at once – to offset some of its short-term volatility.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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