bitcoin (B T c) from its all-time high of $64,900 has turned investor sentiment negative, at least in the short term. While some analysts believe the bottom may have been struck, others are warning of a further downside due to a “death cross” pattern, which is on the verge of completion at the time of writing.
For new traders, the name Death Cross itself brings a lot of negativity and a sense of impending doom. This sentiment can trigger a sell panic, especially if the market is already going through a bearish phase before the pattern appears.
However, is the death cross something to be feared or is it a crystal ball that gives traders insight into when a dip is imminent?
Let us know this with the help of some examples.
What is the Death Cross and how accurate is it?
A death cross is formed when a faster period moving average, usually the 50-day simple moving average, crosses below a longer period moving average, usually the 200-day SMA.
The crossover is bearish as it indicates that the uptrend has reversed direction. Large institutional investors usually do not buy in a falling market until the bottom is confirmed. This leads to drying up of buying and investors panicking to exit the positions, which further aggravates the decline.
Before looking at some death cross examples in the crypto markets, let’s look at how the pattern affected the S&P 500 Index between 1929 and 2019. According to Dorsey, Wright & Associates, LLC, Average The drop after the death cross is formed is 12.57% and the average drop is very low at 7.75%.
However, if only the period after 1950 is considered, the average decline is less than 10.37% and the average is 5.38%.
While these figures are not shocking, especially for crypto traders accustomed to volatility, the bearish convergence of these two moving averages should not be taken lightly.
History shows that death crosses have resulted in some instances of steep declines in US stock market indices.
After the death cross on June 19, 1930, the S&P 500 fell 78.84% and bottomed out on September 15, 1932. The next terrible death cross came with a 53.44% correction, which occurred from December 19, 2007 to June 17. 2009.
This shows how in select instances, Death Cross has been able to predict a sharp correction. However, two sharp falls of over 50% in its 90-year history suggest that the pattern is not reliable enough to cause immediate fear among traders.
Recent death crosses of bitcoin
Since cryptocurrencies are still a nascent market, the available data is limited. Let’s review some examples of death crosses and how it has affected bitcoin.
The most recent death cross occurred on March 26, 2020, when the BTC/USD pair closed at $6,758.18. However, this death cross turned out to be an excellent opposite buy signal as the pair had already made a low 2 weeks ago on March 13 at $3,858.
Earlier, the pair made a death cross on October 26, 2019, when the price closed at $9,259.78. By then, the pair had already corrected 33% from the high of $13,868.44 made on June 26, 2019.
After the cross, the pair came down from the bottom on December 18, 2019 at $6,430, and declined further by 30%. From the high of $13,868.44 high to the low of $6,430, the overall decline was around 53%.
In another scenario, Bitcoin’s roaring bull run topped $19,891.99 on December 17, 2017 and a death cross on March 30, 2018, when the pair closed at $6,848.01. By then, the pair had already corrected more than 65% from the all-time high at that time.
Thereafter, the selling continued and a bear low was made on December 15, 2018 at $3,128.89. This meant a further drop of about 54% from the death cross and an overall drop of 84% from the all-time high.
The above examples show how the death cross occurs late in the bear market cycle and investors who wait for the pattern to form tend to make huge profits in the market. At the same time, introducing bearish bets may work for short-term traders but may prove detrimental to long-term investors.
The examples show how a death cross is a lagging pattern that is formed when a major part of the decline has already taken place. Generally, long-term investors need not panic when they find a death cross on the daily chart, but it is a sign to be more vigilant and perhaps prepare your portfolio for a variety of unforeseen consequences.
Death crosses can, at times, also be used as an opposite signal, so when they are seen traders should look for other signals on the chart to spot a potential bottom.
The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, so you should do your own research when making a decision.