Bitcoin Looking Oversold, but Any Bounce Could Be Disappointing

As bitcoin (BTC) begins August by continuing late July’s decline, a widely used technical indicator is showing the crypto approaching oversold levels. Bitcoin’s trading history, however, implies that the response may be mild.

Bitcoin momentum is in the midst of a nosedive. Its Relative Strength Index (RSI) figure has tumbled 47% since June 23 from 73.52 to 39. Volatility has cratered as well, with bitcoin’s Average True Range (ATR) down 40% over the identical time period.

Where the ATR measures the magnitude and spread of price moves, RSI is a technical indicator that incorporates velocity, and thus serves as a proxy for asset momentum.

As a rule of thumb, readings over 70 imply that an asset is overbought, while readings under 30 imply an oversold condition. Traders sometimes incorporate RSI levels in their trading strategies to determine entry and exit points for an asset.

Conventional wisdom would suggest that bitcoin’s current trajectory would lead to an eventual uptick in prices, but past history indicates that traders will need to be patient.

Since 2015 BTC has proven to be an asset that performs better when its RSI is 70 or higher, as opposed to when it falls below 30, i.e. it does better when in overbought territory than when oversold. The crypto’s average 30-day gain when in overbought conditions has been more than 13%, while its 30-day advance when showing as oversold has been just under 8%.

When filtering BTC’s RSI to the current range between 39 and 40, the performance is even more muted, with an average 30 day increase of just 4% over 64 prior occurrences.

This isn’t exactly horrible news for bitcoiners as the historic performance is still positive. But for traders expecting a big bounce higher from current levels, they may be disappointed.

The CoinDesk Indices Bitcoin Trend Indicator identified a neutral signal for bitcoin on July 24 and prices have been steady since, notwithstanding today’s 1% decline.

What could break bitcoin out of this recent morass?

Unfortunately for bulls, there doesn’t appear to be much on the horizon to change current market dynamics. On a macroeconomic level, there will be plenty of economic reports, but they are unlikely to show anything different than the ongoing story of continued growth and modestly slowing inflation. There is no Federal Reserve meeting in August, but the central bank’s Jackson Hole conference late in the month and Chairman Jerome Powell’s keynote speech might give a clue about the shape of future monetary policy. Few, however, are expecting Powell to deviate very far from the Fed’s recent vigilance against inflation.

Upcoming SEC decisions surrounding recent spot bitcoin ETF filings are likely to be the next catalyzing event, but any news in that regard might not come until after Labor Day, and there’s no guarantee it will be positive..

In some ways BTC appears to have matured as an asset. Where it once behaved as a toddler, reacting feverishly to any and every piece of stimuli, it now behaves like a brooding teen, reluctant to move for anything outside of the most significant of factors.