Is Bitcoin's Rally Overstretched? This Key Indicator Says No
Bitcoin has plenty of room to rally, according to a fundamental analysis indicator that flagged the price bottom in March.
Oct 28, 2020 at 11:20 a.m. UTCUpdated Sep 14, 2021 at 10:24 a.m. UTC
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A historically reliable fundamental analysis indicator suggests bitcoin's rally has scope to continue after its rapid rise to new 2020 highs, contradicting signals on the technical charts.
- While bitcoin's "market value to realized value" (MVRV) Z-score is hovering at two-year highs at 2.12, according to data source Glassnode, that's still well below the 7.0 score at which an asset is considered near a top.
- The MVRV Z-score measures the deviation of market value from realized value, and is used to assess undervalued and overvalued conditions.
- Put simply, the cryptocurrency is slightly overvalued but still has plenty of room to extend the run of gains from the low of $3,867 seen since mid-March.
- The indicator backs up billionaire hedge fund manager and philanthropist Paul Tudor Jones' recent comments that bitcoin's rally has just begun.
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- Historically, an MVRV Z-score below zero has marked bear market lows, while a reading above 7 has marked major bull market tops.
- The Z-score fell below zero, indicating undervalued conditions following the March 12-13 crash, which saw prices fall as low as $3,867.
- Since then, the cryptocurrency has largely stayed on an uptrend.
Conflicting signals
- Bitcoin's 14-week relative strength index (RSI), a popular gauge of price momentum, has crossed above 70.00 on the charts.
- According to the technical analysis (TA) theory, an above-70 figure is a sign an asset is overbought.
- The 14-day RSI, too, is flashing a similar signal.
- TA studies, however, are lagging indicators as they are based on price and relatively less reliable.
- "In a trending market, indicators such as the RSI can remain in an 'overbought' or 'oversold' state for extended periods of time," trader and analyst Nick Cote told CoinDesk.
- Bitcoin's current uptrend looks strong because it's backed by increased institutional participation and expectations for mainstream adoption.
- Online payments giant PayPal recently announced support for bitcoin and other cryptocurrencies.
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- The overbought signal does not imply a bearish reversal, but may yield a minor pullback or consolidation similar to those seen in May and August.
- "For bitcoin, institutionalization is the primary driver for growth in this next bull market. As such, it's better to observe on-chain metrics," Cote said.
- At press time, bitcoin is trading lower near $13,520, having narrowly missed breaching the June 2019 high of $13,880 during the Asian trading hours.
- Disclosure: The author holds small positions in bitcoin and litecoin.
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