Experienced analysts and media outlets, including Cointelegraph, have recently highlighted some signs that the Bitcoin (BTC) rally may be going too far.
These bearish views include co-creator of the Bollinger Bands, John Bollinger, who points out that traders use subsequent stop-losses as “peak” signals accumulate.
However, it should be noted that the Bollinger Bands indicator and the Fear and Greed indicator represent two retrospective calculations. Therefore, these levels usually flash overtime when there is a 30% weekly rally such as the last one.
As cryptanalyst TechDev_52 correctly asked, it is impossible to know if we are entering a major potential correction or continuing the rally.
For example, popular YouTuber and trader Nebraskangooner reveals that the latest high of $ 56,000 could be the upper band of the bullish channel that has been driving Bitcoin since late July.
This “greedy” situation can last for weeks or months.
Returning to the Fear and Greed Index, here are some examples of how such a meter can maintain overbought levels for more than three or four weeks.
Bitcoin Fear and Greed indicator (top) and bitcoin price on Bitstamp (bottom). Source: btctools.io, TradingView
Note that from Jan 29 to Feb 26, the Bitcoin Fear and Greed indicator stayed above 65, indicating that traders were convinced.
The calculations use trading volume, open futures, social calculations, and research data to calculate how far the market is going.
Thus, after the warning sign appeared, it took four weeks before there was a significant correction in the bitcoin price. Whoever sold in the early days after the indicator flashed missed the 70% rally that followed.
A similar pattern was observed between July 23rd and August 25th, when the bitcoin price continued to rise. Yes, the fix will always happen at some point, but how many weeks or months after that?
Bollinger Bands indicator, a good short-term indicator
John Bollinger is an experienced and respected trader, but the indicator is a moving average plus some deviation based on current volatility. In short, the weekly 30% move will occur outside of this area most of the time given Bitcoin’s typical daily volatility of 4.5%.
Bitcoin price on Coinbase using 20-day bowling tape. Source: TradingView
Undoubtedly, a slight correction tends to follow when bitcoin breaks the upper Bollinger band, but that has absolutely nothing to do with the price two to four weeks ago.
The funding rate was neutral.
Finally, it is necessary to analyze the funding rate, which is the commission that derivatives exchanges charge to balance the risk between long positions (buyers) and short positions (sellers), since their impact is different. Undoubtedly, when there is a wave of buying, the index rises.
Funding rate for Bitcoin perpetual futures for 8 hours. Source: Bybt.com
The current average rate of 0.04% for eight hours, or 0.8% per week, is not unusual. For example, back in December 2020, it remained above 1.5% per week for the entire month, and then again in February 2021.
Similar to the fear and greed indicator, this indicator shows that shoppers gain confidence when it crosses 0.10% every eight hours, but this is not necessarily an alarming level.
As long as buyers are confident that the rally will continue, this will not force them to close their long positions, paying a weekly commission of 1.5% or even 3%. For example, if a shortage of Bitcoin exchanges leads to a recent rally to $ 56,000 as coin holders pile up, there might be room for $ 80,000 or more.
However, a crash can be expected if a bearish event occurs in the near future, such as the rejection of orders for exchange-traded funds or the strict US ban on the coin stack. In this case, Bitcoin will not break the all-time high, and these deferred calculations will finally work.