10x Research: A big one is coming, Bitcoin may drop to $42,000

Original Title: “Bitcoin: This Might be the BIG ONE”

Original Author: Markus Thielen

Compiled by: Odaily Planet Daily Fu Ruhe

Despite the prevailing bullish sentiment surrounding Bitcoin and the cryptocurrency space, it is sometimes crucial to protect wealth or take advantage of significant price declines.

On October 3, 2023, we published an article predicting a substantial rebound for Bitcoin, depending on the Federal Reserve maintaining its current stance, and suggested "selling when the Federal Reserve first cuts rates." This view has garnered significant attention, as the anticipated rate cuts seem to be driven by economic weakness rather than a decline in inflation.

Market Predictions and Analysis

In October 2022, when most were bearish, we held a bullish stance and set a price target of $63,160 for the 2024 halving, ultimately reaching $63,491 on April 20, 2024. Similarly, our year-end target for 2023 was $45,000, with the actual result being $43,613.

Many were disappointed with our report in early February, as we set a 'mere' price target of $70,000 for Bitcoin in 2024. However, we had long predicted a range of $60,000 to $70,000, based on our stock-to-flow analysis, predicting a gradual decrease in returns, with a cycle peak at $62,000. For more details, please refer to our May 9, 2024 report.

Bitcoin is primarily a momentum trading game, and trends are your friend—until they are not. While we can outline potential cyclical developments, trading peaks and troughs requires reacting to breakdown or breakout signals. This approach can lead to losses when false buy signals appear during a rebound, but effective risk management, such as using stop-loss orders, can protect most traders' capital. Although many advocate for holding or dollar-cost averaging, these strategies have not been favorable for investors entering Ethereum or Bitcoin since 2021. We generated a 20% profit from the Ethereum short trading signal that started on July 22; a larger correction may unfold.

Risk Management

Bitcoin has primarily been driven by changes in leverage since March

The key difference between institutional and retail trading is that regulators require institutions to implement risk management principles. This is particularly important in the crypto market, where many tokens have a high likelihood of dropping 99%. For example, Alameda and Three Arrows Capital outsourced their risk management to counterparties willing to lend them billions. However, in any rigorous investment firm, risk managers ultimately intervene and force liquidation of positions.

While institutions may suffer losses of 20% or 40%, they do not hold positions until they are worthless. Every trader, whether institutional or retail, must take responsibility for risk management and set an acceptable threshold for maintaining long-term positions.

Technical Analysis

As shown in the chart below, Bitcoin has broken below the support level of $59,837, with the next minor support level at $55,000, followed by $42,000.

For the past five months, Bitcoin has been in a challenging trading range resembling a top formation. We had predicted that Bitcoin would drop to $52,000-$55,000 in April. Although the lowest point for Bitcoin was $56,500, we suggested re-entering when Bitcoin rebounded above $61,000. In June, we again predicted Bitcoin would drop to $50,000-$55,000, and Bitcoin reached $53,500. Similarly, we recommended re-entering when Bitcoin just exceeded $60,000. However, without strong market structure support, Bitcoin remains susceptible to fluctuations within the trading range. We have been focused on identifying factors that could lead to a breakout or collapse of this trading range.

As shown in the chart below, the monthly stochastic indicator for Bitcoin shows the cycle:

We used two monthly indicators to determine when Bitcoin gains or loses momentum. The monthly stochastic indicator has consistently issued buy signals at the bottom and sell signals at the peak. Over the past two months, we have emphasized the top of this indicator. Bitcoin's rebound ended when it failed to maintain above two standard deviations of the 21-month moving average, similar to patterns seen in January 2018 and April 2021.

While we often analyze on-chain data, they typically do not provide timely signals, which is a primary concern we focus on. On-chain metrics, such as HODL waves, track the number of short-term holders of Bitcoin (3-6 months and 1-3 months). These metrics usually rise during bull markets as more people enter the market. However, since the halving, these numbers have stabilized, indicating that no significant new funds have entered the crypto market.

Additionally, on-chain data suggests that Bitcoin is undervalued when the price is below the realized price (average cost basis). This means that when the market's total price is below the realized price, Bitcoin is considered cheap. Currently, the realized price is $31,400.

Market Participant Behavior

As new participants enter the Bitcoin market and confidence in the network remains high, the system is poised for continued price increases. However, there may also be periods of significant price declines. Since mid-March, we have been warning of potential downside risks due to slowing stablecoin growth and relatively weak ETF inflows (primarily driven by arbitrage positions).

Altcoin Market

The rebounds in May and July 2024 were primarily driven by a significant increase in futures leverage, despite a weak market structure and no new participants entering. Instead, larger participants sold altcoins and shifted funds into Bitcoin. This strategy is similar to the approach taken by Block One after its ICO (rather than foolishly building the promised EOS ecosystem). Given the billions unlocked in recent weeks, other participants may adopt this strategy in 2024 as well. Therefore, many altcoins are expected to decline significantly. We have maintained a very bearish stance on altcoins, especially Ethereum.

Every trader must act as their own risk manager, recognizing that multiple scenarios may occur (we cannot emphasize this enough). When prices fell below $60,000 in July, ETF investors bought the dip, even though ETF holders were at an average loss. This $60,000 level is also the threshold at which Bitcoin mining is unprofitable for the industry, leading to significant price declines due to miners' high beta coefficients.

Future Outlook

Although Bitcoin has been in a gradual downtrend, characterized by three tops and two bottoms, we expect the support line at $55,000 to break, potentially pushing the price down to $42,000. In this scenario, Ethereum may drop below $2,000. While this may seem extreme to some, economic weakness (as indicated by our ISM report indicates), a persistently weak market structure, on-chain data, and our cyclical analysis suggest that further pressure lies ahead.

Our goal is to help investors understand the market by continuously sharing our latest insights. While not all analyses are accurate, as the market is dynamic and new information can change previous views, we strive to provide investors with the most relevant perspectives at the moment. This is why professionals constantly reassess and analyze the market.

Bitcoin and cryptocurrencies will continue to exist and will continue to provide wealth opportunities, but successful trading requires knowing when to participate, when to exit, when to place small bets, and when to go all in. These principles are crucial for staying in "the game."