Troubled bitcoin supporters start contemplating a market bottom

(Bloomberg) – Excitement is building in crypto investor circles and on Twitter over Bitcoin’s stealth rally in July, which has led investors to ponder whether the largest digital asset has bottomed.

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However, given the intensity of boom-and-bust cycles in the industry, many also remain cautious and unwilling to give the all-clear on the mercury nature of digital tokens — even as they see signs that Bitcoin has bottomed.

That’s because it’s happened many times before – the coin is seeing a monster surge that in hindsight turns out to be nothing more than a bear market bounce. And such a decision might be even more tedious right now considering digital assets have traded in tandem with US stocks all year, where there is much disagreement among strategists as to whether the worst of the selling is over.

It’s difficult to pinpoint a bottom, especially “this one, because its rally was fueled so much by young people who had never invested in anything before,” said Matt Maley, chief market strategist at Miller Tabak + Co. ” Crypto is currently a liquidity asset so as long as the Fed tightens it will have a hard time seeing a sustained rally. Second, the asset class has lost a lot of investor confidence, so it will take time to regain that confidence.”

Bitcoin is up about 15% over the past month through Friday, while other tokens, including ether, have posted even better returns. Shawn Cruz, senior trading strategist at TD Ameritrade, says there needs to be a shift in risk appetite before the coin can move significantly higher.

Bitcoin “could probably be a little stuck here,” Cruz said. “It’s about waiting for risk appetite to reverse.”

Many are doing just that — watching stocks to get an overview of how things might be going for digital assets. Noelle Acheson, head of market insights at crypto lender Genesis, points to an investor survey by Bank of America that showed gloomy sentiment and potential investor capitulation. Many stock market observers see a contrary signal in the survey.

She also looks at what is known as the “spent output profit ratio” of long-term Bitcoin holders, i.e. those who have held at least five months on average. The value is currently below 1, meaning even long-time holders are selling at a loss. A drop below this level has historically signaled a bottom is near, she said.

There are many other such analyzes for Bitcoin. The token and its brethren have undergone “one of the heaviest and fastest downside revaluation events in their history,” analysts at Glassnode wrote, meaning a ton of excess leverage has already been removed from the system. And for a floor to be established, investors must experience “a sweeping capitulation event” that exhausts sellers.

They observe a measure called realized value, which shows the difference between a coin’s value at the time it was sold and when it was acquired. It is often viewed as the on-chain purchase price for Bitcoin supply, they said. Right now it shows an unrealized loss of minus 5% and previous bear markets have also all tended to end below the realized price.

“Numerous signals suggest that a genuine bottom formation may be underway,” wrote analysts at Glassnode.

However, eternal optimism is a requirement of being a crypto investor. Billionaire wealth manager Mike Novogratz recently said that the “worst is over in the crypto industry” and that while some of the recent troubles may have heightened distrust among retail investors, the case for Bitcoin is still strong. Meanwhile, the sector’s best-known booster, Elon Musk, said his company Tesla Inc. sold a significant portion of its Bitcoin holdings, though he said the move shouldn’t be seen as a judgment on the coin.

The bottom is in for Alex Tapscott, managing director of Ninepoint Partners’ digital asset group, although he doesn’t rule out a possible retest of $19,000. Still, “the risk/reward ratio for bitcoin is heavily skewed to the upside,” he said. “For the long-term investor, this is a rare and enticing entry point.”

Bottoming out or not has a huge impact on the sector – retail investors tend to shy away from buying when the market is in a downturn. This cohort could begin to slowly move forward again should the notion that a bottom has formed take hold.

Still, calling it definitive is a difficult task, and not everything signals the all-clear. Glassnode analysts also point to the MVRV, which is dividing the market value by the average purchase price. It is currently trading at 0.95, a level not as low as the 0.85 average seen during previous bear markets.

“This may mean further downside and/or consolidation time is required to bottom,” Glassnode said. “However, it could also suggest that there is a greater level of investor support in this bearish cycle.”

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