Bitcoin: How Low Will It Go?

Thesis Summary

Bitcoin (BTC-USD) has just sold off, going as far as breaking below the June low. This can be attributed partly to the recent debacle between FTX (FTT-USD), Alameda and Binance (BNB-USD).

However, this can also be explained by technical analysis, and I was personally expecting a sell-off like this.

Another Liquidation Event

The recent sell-off has coincided with increased concerns that FTX could become insolvent, which became an issue when Binance CEO Zhao announced that Binance would be liquidating its position in FTT, the native FTX token. Binance holds a large amount of FTT because it used to have an equity stake in FTX. When the two parted ways, a large part of the payment it received was in FTT.

This announcement led to millions in outflows of the FTX exchange and also a sharp sell-off in FTT. To make matters worse, it was also revealed by CoinDesk that Alameda Research, a trading company owned by the FTX CEO, Sam Bankman-Fried, held most of its assets in FTT tokens. This puts Alameda, a company with $14.6 billion in assets, in a precarious situation, meaning it is also at risk of liquidation.

Finally, though, it seems that as the CEO of FTX put it himself, “things have come full circle” as Binance, one of the first investors in FTX, has made an offer to acquire the exchange. While this announcement gave Bitcoin some support, the cryptocurrency continues to sell off with the broader crypto market.

The chart above shows the recent moves in Bitcoin, FTT and Binance Coin. We can see that all these coins spiked early in the day, which coincided with the takeover announcement. Binance Coin reacted particularly well, rallying over 20%. However, the sell-off has now continued, with Bitcoin breaking its June low and FTT losing over 80% of its value. This, on a day when stocks are actually up on the day.

The Bitcoin Chart

This recent liquidity crunch could have been predicted, at least once Zhao made it clear he was liquidating his FTT. However, few could have predicted that this would have such a large impact on the crypto market.

But for those that have been following my work, you know I have been expecting Bitcoin to sell off even further, and I believe we would have got there with or without a catalyst like this one.

The two main drivers of my analysis are Elliott Wave Theory and a study of previous bitcoin cycles:

Above, you can see my current EW analysis on Bitcoin, which I usually only share with subscribers. Since the November high in Bitcoin, we have been developing a five wave structure to complete what I see as a C wave in a large-degree wave 4.

The June low was the bottom of wave III, and though I had my doubts initially, this became clear as we saw Bitcoin bounce off this support in a very corrective manner. We rallied towards $24K in a wave V and then created a 1-2 setup to the downside, which is now filling out.

In fact, this recent sell-off would be a wave iii inside of 3, which makes a lot of sense, given its aggressive nature.

Where does Bitcoin bottom?

Calling an exact bottom is hard to do, but my guess is that we will at the very least, get near the region of the Delta Price, which I’ve talked about before. This on-chain metric is obtained by taking the realized price and subtracting the average price.

I won’t explain it in full again here. What’s important to know is that Bitcoin’s Delta Price has traditionally been briefly breached during the final capitulation events of previous bear markets and that the current Delta Price currently sits at around $13,600.

Takeaway

Trading Bitcoin is not for the faint of heart, but with the right approach, it can be done successfully. First off, like with any investment, one needs to understand its fundamentals and why Bitcoin is here to stay, something I did in my last article, Why Bitcoin is Better Than Gold. Secondly, understanding Bitcoin’s history can help us understand where the important resistance and support levels are.