The succession of strong Bitcoin (BTC) corrections from its all-time high at $ 64,900 has made investor sentiment negative, at least in the short term. While some analysts believe it may have bottomed out, others warn of a further decline due to the “Death Cross” pattern that, at the time of writing, is nearing completion.
For new traders, the name of the death cross itself brings a lot of negativity and a sense of impending doom. This sentiment can trigger panic in selling, especially if the market has already gone through a bearish phase before the pattern is detected.
However, is a death cross something to fear or is it a crystal ball that gives traders an idea of when a dip is imminent?
Let’s find out with the help of some examples.
What is a death cross and how accurate is it?
The death crossover is formed when a faster period moving average, typically the 50-day simple moving average, crosses below the longer-term moving average, typically the 200-day SMA.
The cross is bearish as it shows that the uptrend has changed direction. Large institutional investors generally do not buy in a falling market until a fund is confirmed. Because of this, purchases are exhausted and investors occupying positions are rushing out due to panic, exacerbating the decline.
Before looking at some examples of death crosses in the cryptocurrency markets, let’s see how the pattern has affected the S&P 500 index between 1929 and 2019. According to Dorsey, Wright & Associates, LLC, the average the drop after the formation of the death cross is 12.57% and the average drop is much smaller, 7.75%.
However, if only the period after 1950 is considered, the average drop is less than 10.37% and the median is 5.38%.
While those figures are not surprising, especially for crypto traders used to volatility, the bearish convergence of these two moving averages should not be taken lightly.
History shows that the death cross has led to some cases of massive drops in US stock indices.
After the death cross on June 19, 1930, the S&P 500 plummeted 78.84% before bottoming out on September 15, 1932. The next terrible death cross came with a correction of 53.44. % that occurred between December 19, 2007 and June 17, 1932. 2009.
This shows how, in selected cases, the death cross has been able to predict a sharp correction. However, two sharp drops of more than 50% in a 90-year history suggest that the pattern is not reliable enough to instill instant fear in traders.
Recent Bitcoin Death Crosses
Since cryptocurrencies are still a nascent market, the data available is limited. Let’s review some cases of the death cross and how it has affected Bitcoin.
The most recent death crossover 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 counter buy signal, as the pair had already formed a 2-week bottom at $ 3,858 on March 13.
Before that, the pair had formed 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 crossover, the pair bottomed out at $ 6,430 on December 18, 2019, suffering an additional 30% drop. From the high of $ 13,868.44 to the low of $ 6,430, the total decrease was approximately 53%.
In another scenario, the roaring Bitcoin bull market hit $ 19,891.99 on December 17, 2017, and the death crossover formed 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.
The sale continued thereafter and the bear market bottom was formed at $ 3,128.89 on December 15, 2018. This meant an additional drop of approximately 54% from the death crossover and a total reduction of 84% from the all-time high.
The above cases show how the death crossover occurs at the end of the bear market cycle and investors waiting for the pattern to form return a lot of profit back to the market. At the same time, initiating bear bets can work for short-term traders, but could prove detrimental to long-term investors.
The examples show how the death cross is a lagging pattern, which forms when much of the decline has already occurred. Long-term investors generally don’t need to panic if they see the death cross on daily charts, but it is a signal to be more vigilant and perhaps prepare one’s portfolio to position for a variety of unforeseen outcomes. .
Death crosses can also, on occasion, be used as a counter signal, so when detected, traders should look for other indications on the chart to detect a possible 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 trade move involves risk, you should do your own research when making a decision.