Bitcoin shows a shift to negative momentum

Key points:

• A momentum-based RSI model for Bitcoin has shifted from a bull to a bear regime.
• Sentiment has turned fearful, with the Crypto Fear & Greed Index dropping to extreme lows, a condition that has historically been bearish for Bitcoin in the short term.
• Broad market breadth and trend-following systems for Bitcoin have also turned unfavorable.

Price momentum in Bitcoin turns unfavorable

Bitcoin's high volatility makes it an ideal candidate for momentum trading. The digital currency frequently experiences significant price swings that present numerous trading opportunities. With Bitcoin's rapid shifts, traders can leverage momentum strategies to capture upward and downward moves.

The Relative Strength Index (RSI) is particularly well-suited for detecting these momentum shifts, as it measures the speed and degree of price movements.

A simple trading system that uses the Relative Strength Index (RSI) to identify bullish or bearish momentum regimes triggered a buy signal for Bitcoin when the RSI rose above 68. This bullish status will persist until the RSI dips below 34. 

On Monday, the model shifted to a bear market regime.  For related backtest, click here.

This RSI system has generated 20 buy signals in the past, with a success rate of 65%. The average win was a massive 1187.7%, while the average loss was -15%.

The table below lists the entry date for each signal and the returns over various timeframes. The RSI system has an 89% win rate over a one-year period. However, it is worth noting that, with the exception of the April 2020 signal, recent returns have been far lower than those seen in Bitcoin's early stages. Traders should adjust their expectations accordingly.

Bitcoin frequently experiences massive price swings, and traders must be able to withstand maximum drawdowns of up to -68.2% during the holding period.

Investor sentiment toward cryptocurrencies has turned pessimistic

The Fear & Greed Model is based on a model published by CNN on their official website (we recommend visiting their site for more information on the model). This is our calculation of that model based on the input data discussed on the CNN site. It does not reflect the values published by CNN, but rather our interpretation of the model.

The Crypto Fear and Greed Index shows extreme panic in the market, with the reading dropping to a very low level. While fear often presents a buying opportunity in traditional markets, this specific sentiment gauge for crypto does not align with that contrarian strategy.

Whenever the Crypto Fear and Greed Index has dropped from above 50% to 10% or lower, the outlook for Bitcoin over the subsequent few months has historically been negative. For related backtest, click here.

A broad tailwind fades

Several simple Bitcoin trading systems indicate that Bitcoin is shifting into an unfavorable position.

Furthermore, market breadth indicators for the cryptocurrency market also show a negative status.

You can explore more market breadth indicators for the cryptocurrency market on the website here.

What the research tells us...

Bitcoin is currently facing headwinds from multiple directions. A key momentum model based on the RSI has shifted into a bear regime, a condition that has historically preceded significant volatility and drawdowns. Compounding this technical weakness is a deterioration in sentiment; the Crypto Fear & Greed Index has collapsed to extreme lows, a signal that, unlike in equities, has historically warned of further downside for Bitcoin in the near term. With breadth indicators also rolling over, the weight of the evidence suggests a cautious stance is warranted for the crypto market.