Buy when there’s blood in the streets
“The time to buy is when there’s blood in the streets, even if the blood is your own.” - Baron Rothschild
Picking Local Bottoms
The recent Bitcoin and cryptocurrency pullback has been remarkably swift and severe. What caught many investors off guard was the fact that Bitcoin (BTCUSD) had been holding up relatively well, even rallying over 20% after an initial 18% correction.
Heading into the middle of the week, BTC was trading just 7% below its all-time high and seemed to be gaining strength after the latest Consumer Price Index (CPI) report.
However, the market took a sharp turn, with BTC plunging nearly 18% from its recent peak. This sudden downturn stands in stark contrast to the performance of some other popular cryptocurrencies, such as Solana (SOL), Cosmos (ATOM), Dogecoin (DOGE), and Lido DAO (LDO). These altcoins had already been trading significantly weaker, and are now down around 30%, erasing a substantial portion of their gains made this year.
I believe we may have reached a favorable risk-adjusted area in the market, and I want to highlight this with you, my dear readers. As you know, identifying a market bottom is a process, so it's crucial to do your own due diligence. However, there are a few key indicators that I closely monitor to assess the potential for near-term local bottoms.
Liquidations
Any veteran perpetual futures trader can vividly recall the volatile, liquidation-heavy days of the BitMEX era. Even today, monitoring liquidations remains a crucial indicator for understanding when over-leveraged traders are being forced out of the market.
As the chart clearly shows, on Friday, we witnessed the highest level of Bitcoin liquidations since the prior market trough in mid-March. This surge in forced liquidations is a telling sign that the recent pullback has taken a heavy toll on over-leveraged positions.
However, the story did not end there. What was even more significant was the follow-through lower low in Bitcoin's price action on Saturday, which was accompanied by even more liquidations. This suggests that the near-term bottom pickers had been thoroughly flushed out, potentially clearing the way for a more sustainable recovery.
By closely tracking these liquidation spikes, we can gauge the degree of leverage in the system and assess when the market may be nearing a point of capitulation. Elevated liquidation volumes, like those observed on Friday and Saturday, often signal that the selling pressure could be starting to subside, potentially paving the way for a possible near-term price reversal.
Funding rate
Another key indicator I closely monitor is the funding rate.
The funding rate is a measure of how much perpetual futures traders are willing to pay to carry their positions. As the chart clearly shows, at one point the funding rates on Deribit were annualizing at an astounding 180% per year.
This extended, deeply negative funding rate reading is highly significant. Such an extreme level of funding rate indicates that short positions were being heavily penalized, making it highly unprofitable to maintain a bearish stance. Typically, when funding rates reach such extreme levels, it can signal that the market is nearing a point of capitulation, as the shorts are being squeezed out.
By monitoring the funding rate dynamics, we can gain valuable insights into the overall sentiment and positioning in the market. Excessively negative funding rates, like those observed in the chart, often precede sharp price reversals as the over-leveraged short positions are flushed out.
Breadth reading
Finally, one of my favorite indicators to monitor is the market breadth. Specifically, I like to track the number of Binance perpetual futures contracts that are currently trading above their 8-day moving average.
This metric provides valuable insights into the underlying strength and participation across the broader cryptocurrency futures market, rather than just focusing on the price action of a single asset like Bitcoin.
When we saw Bitcoin (BTC) break below the $60,000 level on Saturday, the breadth data painted an extremely concerning picture. At that time, a staggering 0 out of the over 250 Binance USDT-margined perpetual futures pairs were trading above their 8-day moving average.
This is an absolutely extended reading - the lowest I've seen since I started tracking this metric. Such a widespread breakdown in market breadth suggests that the selling pressure has become highly pervasive, with the vast majority of futures contracts exhibiting significant weakness.
Typically, when we see such an extreme deterioration in breadth, it can be an early warning signal that the market is nearing a point of capitulation. The fact that virtually no futures pairs were able to maintain their short-term uptrend indicates that the underlying strength and participation has been severely eroded.
Takeaway
These technical indicators I've discussed - the liquidation activity, funding rates, and market breadth - are just a few of the many factors I monitor when trying to identify potential market bottoms. However, as I always emphasize, you must conduct your own thorough research and analysis before making any investment decisions.
At the same time, it's important not to get too caught up in the minutiae- the market will always give you a reason not to buy. Trying to time the market perfectly can often lead to paralysis and missed opportunities.
Sometimes the best approach is to simply "hold your nose and buy" when the conditions seem ripe.