Bitcoin: More Rough Waters Ahead (BTC-USD)

Produced by Ryan Wilday with Avi Gilburt and Jason Appel

In previous articles, I saw $16K as a key level for Bitcoin (BTC-USD). This level stands between a more immediate end to the current bear, now running over 13 months, and a bear market that could extend well into 2023.

In Elliott Wave analysis, the $16K is the 50% retrace of the supposed third wave off the 2018 low. That third wave started with the “COVID crash” bottom struck on March 13th, 2020. That retrace is where a reliable fourth wave should hold, before commencing the fifth wave.

In Bitcoin’s case, I expected that fifth to take Bitcoin into $125K. I show what this count would look like in the chart below with the blue box representing this support region. This has been my primary count since late 2021 but it looks like I will be pushed to follow my alternate discussed below.

Bitcoin spiked below $16K by about $500 on November 21st and quickly rallied. Normally, I can accept a spike below a key level if a rally soon commences, as is the case with Bitcoin on that day. However, since then, that reversal has rallied correctively by Elliott Wave standards, suggesting that another break of $16K should come in the near future.

Elliot Wave analysis looks for five waves off a low to suggest that a trend can change. Determining whether a structure is five waves or not is not just based on visual analysis alone. It also involves evaluating structure using Fibonacci retraces and projections to measure the proportional relationship of each sub-wave to another.

The details of this method are beyond the scope of this article. But essentially, I have to consider the move off the November 21st low as three waves. This is indicated by the ABC structure into the December 4th high, marked with the label Circle A. The subsequent high on December 14th was made in three waves, so is viewed as a “high B” that breaks above the end of the A wave. This sort of B wave is common in crypto.

Counting the December 4th high as A means there should be a C wave into the $18,300 region to complete wave IV, before Bitcoin drops to $13,500.

However, I am also tracking a secondary, more immediate bearish count where we have seen all of wave iv where the black count indicates (B). This scenario became a solid potential when Bitcoin formed an impulsive move down from Y/(B). This indicates an immediate move down $13,500 is possible, and it would be confirmed by a drop through $15,875 from here. I rendered this potential in red.

Bullish Alternative

Both of the above scenarios are ultimately bearish, one with an upward detour first. I can come up with a bullish view that is low probability. This would require five waves up to $19,500, indicated below. This structure would be called a diagonal and is valid in reversals as a wave 1, or the end of a move in the form of a wave 5.

The sub-waves of such structures usually take on an ABC structure, as I’ve shown above. However, these structures are not reliable for aggressive trading until all five waves and the subsequent wave 2 hold. I mention this only so you know where I am clearly wrong about Bitcoin making new lows in the coming weeks to months.

A New Primary Count

Now that we have spent time on the microstructure, we have to look back at the weekly chart. As stated, breaking down to $13,500 invalidates my primary long-term view, so we need to revisit it. In short, the current bear market should go on for many more months. And, I have to adopt an alternate count I have considered as my new primary view.

Breaking to $13,500 indicates the top in 2021 is a B wave top, in a large-scale flat correction that started when Bitcoin topped at close to $18K in December 2017. From the perspective of Elliott Wave analysis, the bear market in Bitcoin that moved it downward in 2018 never ended. It had three phases:

1. A bearish A wave in 2018

2. A bullish B wave from 2019 to mid-2021

3. A bearish C wave from mid-2021 until the present.

In this view, Bitcoin shouldn’t finish this bear market in 2023. Ideally, it starts a rally after a bottom near $13,500 into the $20K-$25K region before finding a final bottom near $3K-$6K.

After this bear market is over, I expect a multi-year rally to a minimum of $160K. And a wildly bullish, multi-year rally to $1.2M is possible. In this second view, though, there should be many mini-bear markets that correct 50% or more. Those potentials will be discussed in detail in future articles when we have a meaningful bottom.

What About the Halving?

This discussion requires that I address Bitcoin cycles, which can be called “halving cycles”. Halving is the cyclical 50% reduction in the Bitcoin block rewards for miners. The next halving is estimated to occur on March 28, 2024. On average, Bitcoin started a new bullish cycle 15 months before halving as the reduction in issuance sparked interest. We are in that window now. See: Bitcoin Halving Clock

I watch this cycle with curiosity. However, I’d challenge the expectation the mass market has for this cycle with a couple of considerations:

1. Halving has occurred four times in Bitcoin’s past. That’s many data points too few for creating a robust strategy.

2. Much of the Bitcoin community focuses on these cycles, and when too many expect a market event, it often doesn’t happen.

I am not saying a new bullish cycle can’t start imminently. To the contrary, I watch these cycles closely. However, I want to see price action confirm the cycle plays out once again.

Tactically Speaking

What you do with this information should be based on your abilities, your risk tolerance, and core intent.

I am both a long-term investor and a swing trader. Occasionally, I trade intraday. At the time of writing, in my short-term accounts, I am short Bitcoin using futures, as well as BITO options. However, in my long-term wallets, I am slowly accumulating. I have made the most in Bitcoin by accumulating near major cyclical lows, but I never assume I will catch the lowest tick. I just make sure the amount I accumulate fits a very small portion of my monthly cash flow.

It may seem foolhardy to start to accumulate when I expect to see $6K. Again, I emphasize that I am keeping additions to my portfolio small and my short-term trading with futures offers a partial hedge of the Bitcoin held in wallets. If you want to take this tactic, expect lower lows and size right to support your emotional and financial comfort.

In Conclusion

To wrap it up, $16K was a very key level for Bitcoin to hold – one at which it should have put in a major bottom. While it has reversed from just below that level, which would have been acceptable, the current rally is not confidence-inspiring. So, I am looking lower, possibly as low as $6K.

But that hasn’t stopped me from accumulating slowly. I consider these cyclical bottoms as opportunities of a lifetime – except that Bitcoin has given me several in my trading life. I’ll keep it slow for now, but when we have a firm reversal, I’ll play the bullish side more aggressively.