Panic struck the crypto market last week when Bitcoin broke below support, stablecoins unpegged from the dollar, and LUNA dropped to zero. The bloody aftermath has left cryptocurrencies as a whole more oversold than the Black Thursday COVID collapse.
Here is a closer look at the historically oversold conditions in crypto.
Total Crypto Market More Oversold Than Black Thursday
It was a bloodbath in Bitcoin, apocalypse in altcoins. Even stablecoins pegged to the price of the almighty dollar were completely shaken. A nefarious actor or group of actors strategically attacked the dollar-peg of the UST stablecoin, causing a domino effect of algorithmically driven liquidation of reserve assets that included BTC.
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Bitcoin plunged through support and many altcoins reached a total drawdown of 80 to 90% or more. LUNA, an asset tied to UST, fell all the way to zero. Billions were wiped out from the total crypto market cap. If there was ever a time to be doubtful about the future of crypto, it might be now. However, market veterans recommend when things become doubtful, you zoom out.
The weekly RSI is more oversold than on Black Thursday | Source: CRYPTOCAP-TOTAL on TradingView.com
“When in doubt, zoom out,” holds true in this case. Comparing the recent crypto selloff with Black Thursday, the weekly RSI has reached even more extreme oversold levels. Meanwhile, the Black Thursday candle recorded a 50% drawdown, and the latest correction by contrast barely produced 30%.
By definition, a hidden bullish divergence occurs when an asset’s price sets a higher low, yet the indicator sets a lower low. This often indicates continuation ahead.
Elliott Wave Theory suggest the cycle isn't complete | Source: CRYPTOCAP-TOTAL on TradingView.com
Could Another 45% Collapse Still Be Ahead?
Elliott Wave Theory could provide clues as to what continuation might look like ahead. The total crypto market cap is also trading within a parallel channel, of which it just touched the bottom of. The upper boundary of the channel is roughly $10 trillion USD.
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While that fact might be the hope bulls need right now, bears still could have the last laugh. The weekly RSI has now reached the lowest level since the bear market bottom and the fourth lowest in its history on TradingView.
Only three other times has the total crypto market cap been more oversold | Source: CRYPTOCAP-TOTAL on TradingView.com
Of the three previous lows set on the weekly RSI, two were bear market bottoms. The remaining low, however, was followed by another 45% plunge to the final bottom. Another 45% drop from here would take the total crypto market cap back to around $600 billion, or below the January 2018 cycle peak.
Simply put, risk is still extremely high, but as oversold conditions increase, so does the potential for reward. Act accordingly.
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Featured image from iStockPhoto, Charts from TradingView.com
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