The Bitcoin death cross, a significant bearish technical pattern, is on the verge of appearing on the daily chart for the first time since January 2022. This pattern occurs when the 50-day simple moving average (SMA) falls below the 200-day SMA, suggesting that short-term price momentum is underperforming the long term and potentially leading to a bearish trend. Ether (ETH) is also nearing a death cross. However, historical data reveals that the Bitcoin death cross is not a reliable standalone indicator, as only two out of nine instances resulted in negative returns over three-, six-, and 12-month timeframes.
Death Cross Coincides with Dollar Index Golden Crossover
As the Bitcoin death cross looms, the dollar index is on track to achieve a golden crossover amid a deteriorating macroeconomic outlook for risk assets. Since mid-July, the index has risen 5.3% to 104.90, reaching its highest level since March 15, according to charting platform TradingView. During the same period, Bitcoin’s value declined by 19%. Bitcoin and other risk assets typically have an inverse correlation with the dollar index. As the global reserve currency, the U.S. dollar accounts for the majority of international trade, non-bank borrowing, and global debt. A rally in the U.S. dollar leads to financial tightening worldwide, exerting downward pressure on risk assets.
U.S. Economy Performance and Federal Reserve Rate Cuts
Analysts at ING suggest that as the U.S. economy continues to perform well, markets are starting to question the likelihood of rapid rate cuts by the Federal Reserve (Fed) in the coming year. Hopes for a dovish Fed pivot partially contributed to Bitcoin’s recovery from its 2022 lows. Since March of last year, the Fed has raised rates by over 500 basis points. The emerging consensus on the low probability of swift rate cuts implies that the path of least resistance for longer-duration U.S. Treasury yields is upward.
Bear Steepening and Its Impact on Risk Assets
A bear steepening, in which long-term rates account for higher and more prolonged interest rates while short-duration yields remain stable, could trigger risk aversion. Ilan Solot, co-head of digital assets at Marex Solutions, expressed his concerns, stating, “I’m finally turning more constructive on crypto (yes, I see the prices), but I fear we must first get through a tricky inflection point on the macro side. The risk is a serious flush out of longer-dated yields and growth assets causing temporary re-coupling crypto as the new sock puppet proxy for quant traders.”
Bitcoin Death Cross in Historical Context
Despite the potential for a Bitcoin death cross to signal a bearish trend, it is essential to consider its historical context. Out of the nine occurrences of a Bitcoin death cross, only two have led to negative returns over three-, six-, and 12-month timeframes. This suggests that the death cross, while noteworthy, should not be the sole determining factor in predicting Bitcoin’s future performance.
Conclusion
In conclusion, the impending Bitcoin death cross and the dollar index’s golden crossover may indicate a challenging period for risk assets, including cryptocurrencies. However, the death cross’s historical unreliability as a standalone indicator of future performance should be taken into account. Market participants should closely monitor the macroeconomic environment, including the U.S. economy’s performance and the Federal Reserve’s rate decisions, to make informed decisions on their digital asset investments.
