Bitcoin Looks Overbought but Analysts Play Down Drop Fears

Bitcoin's rally looks overstretched, according to a technical indicator, but short-term price consolidation looks more likely than a drop, say analysts.

AccessTimeIconJul 29, 2020 at 12:40 p.m. UTC
Updated Sep 14, 2021 at 9:37 a.m. UTC
10 Years of Decentralizing the Future
May 29-31, 2024 - Austin, TexasThe biggest and most established global hub for everything crypto, blockchain and Web3.Register Now

With bitcoin rising to its highest level in 11 months this week, some investors are beginning to worry that the cryptocurrency is overbought and may be due for notable price drop. 

But analysts suggest that's an overreaction.

  • Bitcoin’s price rose to $11,319 on Monday, the highest level since August 2019, according to CoinDesk’s Bitcoin Price Index.
  • At time of writing, the cryptocurrency is trading near $11,100, representing a 18% gain from lows near $9,400 observed a week ago.
  • The sudden rally has pushed the 14-day relative strength index (RSI) above 80.00.
  • A measurement of over 70.00 is considered overbought, meaning the bullish move is now overstretched.
Daily chart of bitcoin's price
Daily chart of bitcoin's price
  • Asim Ahmad, co-chief investment officer at London-based Eterna Capital, said that an above-70 RSI does not necessarily imply an impending major price slide.
  • More likely it indicates that the bullish move is overstretched and vulnerable to consolidation or a minor retracement at worst, Ahmad said.
  • Lennard Neo, head of research at Stack funds, explained the RSI can stay inflated for longer periods in a strongly trending market, adding that other indicators are showing strong buying momentum.
  • The RSI is based on price and remained elevated during the previous bulls runs.

Consolidation ahead?

Historical bitcoin daily charts for 2019 and 2017
Historical bitcoin daily charts for 2019 and 2017
  • Bitcoin remained bid and rose 160% in the second quarter of 2019 (above left) despite the RSI printing highs above 70.00 several times during the three-month period.
  • A similar pattern was observed during the bull market frenzy of 2017 (above right).
  • Back to summer 2020 and the overbought measurement on the RSI may keep the cryptocurrency hovering around $11,000 for some time. Support is seen around $10,500.
  • Rotation of money out of the DeFi space and traditional markets and into bitcoin would create momentum for the cryptocurrency, said Neo.
  • Prices could rise quickly toward $12,000 in the short-term if the U.S. Federal Reserve signals higher tolerance for inflation. That could yield another sell-off for the greenback and send gold above the $2,000 mark.
  • Bitcoin still remains vulnerable to a sell-off in equities, as was seen during the wider markets crash in March, according to Joel Kruger, a currency strategist at LMAX Digital.

Disclosure

Please note that our privacy policy, terms of use, cookies, and do not sell my personal information has been updated.

CoinDesk is an award-winning media outlet that covers the cryptocurrency industry. Its journalists abide by a strict set of editorial policies. In November 2023, CoinDesk was acquired by the Bullish group, owner of Bullish, a regulated, digital assets exchange. The Bullish group is majority-owned by Block.one; both companies have interests in a variety of blockchain and digital asset businesses and significant holdings of digital assets, including bitcoin. CoinDesk operates as an independent subsidiary with an editorial committee to protect journalistic independence. CoinDesk employees, including journalists, may receive options in the Bullish group as part of their compensation.


Learn more about Consensus 2024, CoinDesk's longest-running and most influential event that brings together all sides of crypto, blockchain and Web3. Head to consensus.coindesk.com to register and buy your pass now.


Read more about