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.
- 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.
- 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.
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