Bitcoin plunged 10%, is it time to buy the bottom?

   On November 15, 2023, Bitcoin (BTC) plunged 10% in 24 hours, breaking the key support level of $35,000, marking the largest single-day drop since the FTX crash in 2022.

The plunge triggered violent market fluctuations, with the total market value of cryptocurrencies on the entire network evaporating by more than $200 billion, and the liquidation volume in the derivatives market reaching $1.2 billion.

Against the backdrop of the "fear index" soaring to 75 (extreme panic range), the question that investors are most concerned about is: Is this a good opportunity to buy the bottom, or a precursor to a larger decline?

1. The trigger of the plunge: multiple negative factors are released

1. The macroeconomic "headwind" intensified

Fed Chairman Powell hinted after the November interest rate meeting that "high interest rates may last longer", causing the US dollar index (DXY) to break through 106 and the 10-year US Treasury yield to rise to 4.9%.

Historical data shows that Bitcoin and the US dollar index are significantly negatively correlated (correlation coefficient -0.82 in the past three years), and the strong dollar directly suppresses risky assets.

In addition, the US CPI rebounded to 3.4% year-on-year in October, exceeding the market expectation of 3.2%, and inflation stickiness weakened the market's bet on interest rate cuts in 2024.

FalconX, a cryptocurrency liquidity provider, pointed out: "When real interest rates (nominal interest rates-inflation) are expected to rise, Bitcoin's 'digital gold' narrative will temporarily give way to the attractiveness of US dollar cash."

2. The "Sword of Damocles" of regulation is coming again

On November 14, the U.S. Securities and Exchange Commission (SEC) postponed the approval decision of the Bitcoin spot ETF applied by BlackRock and other institutions, and postponed the final deadline to January 2024. Although the market generally expects that the approval of the ETF is only a matter of time, regulatory uncertainty still triggers short-term selling.

What is more worthy of attention is that the U.S. Department of Justice's escalation of sanctions on the cryptocurrency mixer Tornado Cash and the upcoming entry into force of the EU's "Markets in Crypto Assets Regulation" (MiCA) have further exacerbated concerns about compliance costs.

3. Technical "Death Cross" Signal

From a technical analysis point of view, the Bitcoin daily chart shows a "death cross" (50-day moving average crosses below the 200-day moving average), which is the first time since May 2021.

At the same time, the price fell below the lower track of the Bollinger Band, and the RSI indicator fell to 28 (oversold range), but there was no bottom divergence signal, suggesting that the downward momentum has not yet exhausted.

On-chain data also released an alarm: CoinMetrics data showed that the "whale" address holding 1-10 BTC reduced its holdings by 32,000 BTC in the past week, while the inflow of exchanges surged to 45,000 coins/day, the highest level since June 2022, indicating that short-term selling pressure was concentrated.

2. Bottom-fishing? Assess the three core risks first

1. The risk of "serial explosion" of leveraged positions

As of November 15, the open interest in the crypto derivatives market was still as high as US$22 billion, of which the funding rate of Bitcoin perpetual contracts remained negative (-0.01%), indicating that shorts dominated the market.

However, it should be noted that if the price further drops to $32,000 (the support level of the rising trend line in 2023), it may trigger more forced liquidations, forming a vicious cycle of "fall → liquidation → fall".

Glassnode warned that the current market leverage ratio (open contracts/market value) is 3.8%, which is lower than the 5.2% at the peak of the bull market in 2021, but still higher than the historical average, and there is a systemic risk.

2. Miners "surrender" selling pressure

Bitcoin's total network computing power fell by 12% after the plunge, indicating that some high-cost miners shut down. According to the HashRate Index model, the current Bitcoin production price (taking into account electricity costs, hardware depreciation, etc.) is about $28,000.

If the price is lower than this level for a long time, it may trigger miners to sell their inventory of BTC to maintain operations.

Historical data shows that the bottom of the bear market in 2018 ($3,100) and the "Black Thursday" in 2020 ($3,800) were both accompanied by large-scale surrender of miners. The current balance of miners' wallets is 1.82 million BTC (accounting for 9.5% of the circulation), and their selling behavior may become a sword hanging over their heads.

3. Macro "black swan" incubation period

Macro variables such as geopolitical risks (such as the escalation of the Israeli-Palestinian conflict), the US government debt ceiling negotiations, and the commercial real estate crisis may be transmitted to the crypto market through "risk appetite contraction".

Morgan Stanley strategist Sheena Shah pointed out: "Before the volatility (VIX) of the traditional market stabilizes, Bitcoin's independent market will be difficult to sustain."

3. Bottom-picking signal: waiting for three "green lights"

1. Fed policy shift signal

If the US unemployment rate exceeds 4.5% or the non-farm employment data is below 100,000 for two consecutive months, it may trigger the Fed's policy shift. History shows that the average return rate of Bitcoin in the Fed's interest rate cut cycle is 287% (2019-2021).

At present, we need to pay close attention to the dot plot of the December FOMC meeting and the Fed's adjustment of the 2024 economic forecast.

2. On-chain data "bottoming out" signal

Exchange net outflow turned positive: In the past 24 hours, the exchange BTC balance decreased by 12,000, but it is necessary to continue to observe whether a trend is formed.

Long-term holders (LTH) increased their holdings: The current LTH holdings account for 72.3%, close to the historical peak. If this ratio continues to rise, it indicates that "diamond hands" have begun to buy the bottom.

SOPR indicator (spending output profit rate) <1: This indicator reflects the profit selling ratio, which is currently 0.95. If it continues to be lower than 1, it indicates that the market has entered the "capitulation selling" stage.

3. Technical "verification" support level

US$32,000 is a key psychological level. This position is both the support level of the rising trend line in 2023 and the 50% Fibonacci retracement level of the bull market in 2021. If the price shows a bottom pattern such as a long lower shadow and increased trading volume in this area, it may constitute a short-term buying point.

However, it is necessary to be wary of the risk of "false breakthroughs". It is recommended to confirm the rebound momentum in combination with the daily MACD golden cross.

4. Operational strategy: build positions in batches and strictly control risks

Spot investors:

Divide funds into 3-5 parts, buy in batches in the range of US$32,000-35,000, and increase positions every 5% drop.

Prioritize the allocation of assets that are indirectly exposed to the crypto market, such as Bitcoin spot ETF (if approved) and Coinbase stocks (COIN).

Derivatives traders:

Leverage long orders around US$32,000, set stop loss at US$29,000 (2023 low), and target price of US$38,000-40,000.

Obtain premiums by selling out-of-the-money put options (such as US$30,000 strike price) to reduce holding costs.

Risk warning:

Avoid using high leverage (more than 5 times) to prevent short-term fluctuations from causing liquidation.

Be wary of the liquidity risks of altcoins and give priority to mainstream assets such as BTC and ETH.

Every plunge in Bitcoin is the ultimate test of market faith. Historical data shows that after a drop of more than 20%, Bitcoin will rebound an average of 68% in the next three months (data from 2015 to 2022). However, the core of bottom-fishing is not to "predict the bottom" but to "manage risks".

For long-term investors, the current price has entered the value range, but position management is required; for short-term traders, they need to wait patiently for the resonance signal between technical and fundamental aspects.

As the legendary trader Paul Tudor Jones said: "At the bottom of the bear market, you will feel fear, but you should see opportunities." This storm of Bitcoin may be the prelude to the next bull market.