Key Takeaways

Bitcoin has fallen ~11% since Tuesday, putting it on pace for its worst two-day stretch since the second week of May.
Part of the reason for the sell-off is technical in nature; its price broke below key support, confirming a head and shoulders pattern, which accelerated the decline.
Short-term pain in the crypto market comes amid the worst daily decline for the S&P 500 since early June and the largest one-day jump for the VIX Index in almost three months.

This week’s crypto sell-off appears to be driven by a culmination of factors. The latest DeFi craze was arguably overdue for a pullback, but bitcoin’s slide indicates there may be more to this than just pure profit taking.

Part of this pullback is technical in nature, but it also comes amid a broader sell-off in traditional markets as well. Bitcoin has fallen ~11% since Tuesday, putting it on pace for its worst two-day stretch since the second week of May.

BTCUSD vs. Rolling 2-Day % Change

Part of the reason for BTC’s latest sell-off is purely technical; its price broke below key support, confirming a head and shoulders pattern, which accelerated the decline. If we use trading day closing prices, BTC could trade as low as ~$10,100 if weakness persists (intraday pricing puts it just below $10,000). If bitcoin were to drop below $10,000 it would serve as a notable headwind, at least in the short-term, given it’s become a major support level at this point.

BTCUSD – Head & Shoulders

However, there’s still a ways to go before we lose confidence in the long-term uptrend for BTC. That being said, $10k is not that much of a stretch if we see another day like today…

BTC Post-Breakout

Short-term sentiment has also rolled over with BTC’s 30-day average daily sentiment score falling below 50 for the first time since mid-June. The period was short-lived, however, and turned out to be a solid entry point before BTC broke out of an extended consolidation range.

BTCUSD vs. 30-Day Avg Daily Sentiment Score (The TIE)

Source: The TIE

I’ve noted the relationship between BTC and equity market volatility time and again (see this recent Daily post for more context), so is it any surprise the VIX today happened to see its largest single-day jump in nearly three months?

Intraday BTCUSD vs. VIX Index (Inverse)

Source: Cboe, Bloomberg

It’s important to note, volatility tends to rise in the later months of the year, so it wouldn’t be shocking to see the VIX remain relatively elevated in the coming months.

Also of note, BTC led the decline in the S&P 500, which suffered its worst one-day decline today (-3.5%) since June 11th.

BTCUSD vs. S&P 500 E-Mini Futures

Source: CME, Bloomberg

Now, this is just a taste of a larger Bitcoin report we’ll be releasing for Insights subscribers soon, but a few of these trends/indicators are worth watching as we head into the final months of 2020.

There are several potential paths forward, each with varying degrees of likelihood in the near term.

BTC continues to fall, in which case it’s unlikely the rest of the crypto market will be able to break from its gravitational pull.
The last couple days were simply a healthy pullback, which is more than possible seeing as how BTC’s long-term uptrend is still intact; no bull market is ever a straight line.
Pent up demand sitting on the sidelines piles in to bid up bitcoin in its time of need, saving BTC from dropping below the all-important $10k level that we all worked so hard to break out from (anyone have Paul Tudor Jones on speed dial?).

I’ll be digging into each of these in the report but, either way, it’s clear bitcoin (and the rest of the crypto market) will be top of mind for many investors going forward, especially if conventional risk assets (i.e. stocks) start to fall through the underlying cracks in the market.