Bitcoin (BTC), as the world’s premier cryptocurrency, continues to suffer from its growing correlation with US equities at a time when the Federal Reserve is determined to hammer risky assets to curb the wealth effect that permeates the US economy, hoping to bring consumer spending under control. and cool the current burning inflationary impulse.
As a reminder, the Federal Reserve had chosen to raise its benchmark rate by 50 basis points (bps) on Wednesday, triggering a torrid rally between assets as investors breathed a sigh of relief on avoid a 75 basis point hike. However, the rally perversely led to the monetization of downside hedges, leaving the market vulnerable to downside pressures. This lower leg came on Thursday when the market suffered its biggest loss since 2020. Given that Bitcoin’s 60-day correlation with the S&P 500 Index now exceeds 0.6, hitting a new all-time high in the process, a decisive lower leg was almost a certainty. Keep in mind that the current correlation reading indicates that more than 60% of Bitcoin’s movements are explained by corresponding movements in the S&P 500 index.
Technical analysis suggests Bitcoin is primed for a bounce, and on-chain metrics agree
The chart above highlights the pivotal price levels to watch for Bitcoin. As is evident, the price of the cryptocurrency is currently perched atop a major support zone. Additionally, another support zone lurks just below the current one. This means that the wider support zone extends up to the $29,000 price level.
If these support areas hold, Bitcoin may continue its consolidation pattern, building ammunition for an eventual surge. For an uptrend to hold, the cryptocurrency must cross its medium-term downtrend line (shown in red) and decisively break through the major resistance located around the $45,000 price level. (shown in purple).
Going forward, Bitcoin’s exchange-based and on-chain metrics suggest a rebound is in order, increasing the likelihood that the support areas outlined above will continue to hold.
For example, on May 05, Bitcoin experienced the highest liquidation of long positions since February 7. High liquidations are often a sign of capitulation, setting the stage for a sustainable upward ramp.
This observation is supported by the fact that Bitcoin balances held on exchanges have increased significantly in recent days. As a reminder, the Bitcoin balance held on an exchange is an early indicator of liquidations, as cryptocurrency balances on exchanges are more likely to be liquidated than those held in cold storage.
Switch to on-chain metrics, a read of Bitcoin Active Address Sentiment indicates that a rebound is now in order. This metric compares the 28-day change in Bitcoin price with an equal period change in active addresses. The current reading suggests that short-term sentiment has now entered oversold territory.
Reserve risk measures the confidence of long-term holders of Bitcoin in relation to the current price of the cryptocurrency. The current reading has now entered the support levels outlined in green. This suggests that long-term holders have greater confidence in Bitcoin’s outperformance against the current price level.
In our previous article on this topic, we predicted that Bitcoin would likely test the $37,000 price zone. This prediction has now come true. We are now actively looking for a big rally in the price of the cryptocurrency. However, due to the prevailing high correlation regime between Bitcoin and US equities, a retest of the $29,000 price zone followed by a subsequent significant rally remains a viable possibility.