Bitcoin is in a bear market, but for how long?

Bitcoin (BTC) broke through the 200-day exponential moving average last week for the first time in a year, confirming that a new bear market is now in play.

Bitcoin dropped more than 30% in May, the worst drop since November 2018. In 2019, it traded below the 200-day moving average of three occasions, but has remained above this line for the last 13 months.

Elon Musk may have been the trigger for the latest sharp drop, and in doing so shot himself in the foot (given Tesla’s $1.5 billion purchase of BTC in February), but there were signs of weakness, notably a range-bound market since February. That’s an unusually long time to remain range-bound without a decisive breakout in either direction. The longer the price failed to break out on the upside, the more likely it was to break out on the downside.

Bitcoin breaks down through 200-day moving average

Matt Weller at Forex.com points out that the current drawdown is just the third -30% pullback of the current bull market, though measured from peak to trough, the current -55% pullback is deeper than any selloff seen in 2016 and 2017.

He also notes that the price gains in the current bull market cycle are below the historical average “raising hopes that the bull market is alive and well”.

The graph below from Forex.com shows there were seven pullbacks of 30% or more between 2015 and 2017.

The number of 30%-plus drawdowns in bitcoin 2015-2017

The next graph from Coindesk shows the relative lengths of the bull and bear markets since 2014, which appear to be getting shorter since 2018 (though the latest bull market at 407 days appears to have disrupted this trend).

Billionaires by the fistful

Lukas Wiesflecker at Coinmonks points out the absurdity of the latest bull run that made billionaires by the fistful: There were 69 unicorns in March this year – that is, cryptocurrencies with a market capitalisation of more than $1 billion. By May there were nearly 100.

“Among these unicorns are many more zombies than living ones, more dead and unused blockchains than applications, more failed technologies than breakthroughs,” says Wiesflecker.

Five of the top 10 cryptos trading on the Uniswap exchange were “dog meme” coins with no real utility or technology behind them. Yet they generated $1.5 billion in trade in one day earlier this month.

“When so many unimaginatively set-up s***coins generate so much trading volume — can there be a clearer sign of a bubble?” says Wiesflecker.

Many of these ‘meme’ coins will likely disappear, but some will survive, and there is no certainty that this bubble is anywhere near finished, particularly for established coins like bitcoin and ether (ETC).

Continued adoption

Bitcoin’s continued adoption by institutional and corporate investors looking for refuge from the inevitable inflation that comes with central bank money printing suggests this latest drop is a breather in a much longer bull market still to manifest.

Another point to consider: previous bear markets have been preceded by sharp run-ups in price, followed by a steeply declining drop. That did not occur this time. The run-up was steep, but the drop took months to gestate.

A review of the historical charts doesn’t quite reveal the despair that trailed the bitcoin crown back in 2015 and again in 2018, when there were dire warnings that the price was headed to zero.

A market analysis by Glassnode suggests that recent bitcoin sellers were mainly newcomers to the market.

Once the price stabilises and there are signs of recovery, yet another generation of retail adopters will enter the market. That may be some time off, but history tells us that will provide impetus to the next bull wave. There will be some aggressive corrections along the way, but with each bear market, BTC moves from weaker to stronger hands.