Bitcoin and Ether decline alongside general crypto market drop

Correlations in the crypto market are hard to come by and change with ease. At times the market shows a strong relationship with the S&P 500 and at others, the opposite, often depending on which phase of the crypto craze/winter it’s in.

As of late, the market has been showing a higher correlation with the tech sector and given that it is usually a sector in retreat, often suffering the largest losses, it is no surprise that it was in for a significant drop.

Crypto has the capacity for more volatility and that was evident yesterday as Bitcoin and Ether dropped around 8% each. Cryptocurrencies like Cardano, Neo, EOS, and Polkadot are in for a larger drop in the double-digits, and as of writing have been attempting a larger recovery off of the lows in percentage terms.

Those trading cryptocurrencies in this phase should note tech stocks, the tech sector, or a tech-heavy index like the Nasdaq 100 (US Tech 100) as traders have been following the bond market, hoping the worst is over. The recent plummet has sent bond yields higher as bond prices and yields are inversely correlated.

Those in the bond market note the extent the US Federal Reserve could get aggressive with market pricing of rate hikes. Rate hikes are expected to occur over the year to tackle inflation while today’s CPI (Consumer Price Index) readings are expected to remain hot.

Elsewhere, CoinShares’ weekly report showed institutional outflows last week for both Bitcoin ($132m) and Ether ($15.3m), though the latter wasn’t the rule for altcoins with both Solana and Cardano enjoying inflows.

Bitcoin technical analysis, overview, strategies, and levels

Technicals mean less when there are fundamental factors at play – or at least when correlations are this strong even if they subside in the future.

When looking at the daily time frame, it is clear that negative technical bias has been building. With prices at the lower end of the Bollinger Band, a negative DMI (Directional Movement Index) and with a DI- above the DI+ by a margin that has only risen and by one calculation, it is not a trending ADX (Average Directional Movement Index) just yet, even if that reading is rising.

Classifying a technical overview in this state is trickier as traders usually eye support levels when prices go into retreat with $37K+, $34K+, and $33K being the noteworthy ones on the chart. Daily levels calculated on the recent intraday movement put prices at $38.5K and $37.5K to the downside, and upside resistance levels at roughly $40.5K and $41.5K.

It’s ‘consolidation – volatile’ in the sense that most moves have been consolidatory and rangebound unless there’s been a change in its underlying. Overall making it breakout vs. reversal (especially when preceding a volatile move).

Those looking to oppose the market trend ought to initiate reversals after a significant one and not go opposite, a move directly at the levels to avoid getting stopped out.

IG client* and CoT** sentiment for Bitcoin and Ether

When it comes to trader bias, retail sentiment has been a consistent extreme buy for cryptocurrencies in general and has been averaging around 80% for over a year now.

For Bitcoin (see the following two charts), the latest reading is at 86% following the price drop while Ether retail trader bias is higher, at an extreme buy at 89%.

As for larger speculators according to last Friday’s CoT** release out of the CFTC, it has been consistently near the middle for Bitcoin with a slight sell of 51% and Ether majority short at 57%.

Both long and short positions usually enjoy similar changes with much of the action attributed to arbitrage strategies. Hence why they don't contribute much in giving us the institutional picture as accurately as some of the other products in the report.

Bitcoin chart with retail and institutional sentiment

*The percentage of IG client accounts with positions in this market that are currently long or short. Calculated to the nearest 1%, as of today morning 8am for the outer circle. Inner circle is from a week ago.

**CoT sentiment taken from the CFTC’s Commitment of Traders report, outer circle is latest report released on Friday with the positions as of last Tuesday, inner circle from the report prior.