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- A Crypto Warning
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1,467 Words | 6 Min 7 Sec Read
Welcome to another issue of Passionate Income.
Today we’ll be discussing the current status of the crypto market.
In particular, Bitcoin's recent 15% drop, subsequent bounce higher, and what it means for the short to medium-term.
Let’s dive in.
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In our last issue we applauded Bitcoin for reaching the critical $100,000 level.
Since then, it climbed as high as $108,230 before dumping 15% to $92,325.
As we discussed in that issue, it was not only possible - but likely - that Bitcoin would fall in the near future.
Historically, we've seen dips anywhere from the last two weeks of December to the first two weeks of January.
This year the descent came early, with Bitcoin peaking on the 17th before beginning its fall on the 18th.
Which raises the question: What comes next?
In markets, there's a constant exchange between buyers and sellers.
Problem is, when prices climb too high too fast, you eventually run out of buyers. At which point even the slightest scare can spook people into selling.
In a strong market, those sales will be eaten up by people hungry to get in on the action (which they assume will go higher).
In a weak market, however, prices can drop dramatically before buyers finally start to nibble again.
I bring this up because as of Wednesday, December 18th, the winds of the crypto market shifted.
While the (admittedly scary) plummet we saw on Thursday December 5th was strong, it happened within the context of a strong market.
Mainly because the action we saw that day was a liquidity grab (discussed in previous issue) designed to shake out highly leveraged traders (which are unhealthy for the market) before continuing the climb higher.
But when prices dropped this Wednesday, we didn't see the same level of buyer strength on the rebound.
Instead, once prices started dropping, they continued falling.
The (somewhat) positive news is that - even though prices dropped to the same level they did on Dec. 5th - they stopped falling around the same area.
The bad news is that unlike Dec. 5th, they did not resume the climb higher.
Instead, they've been hovering much closer to the Dec. 5th low (~$92,300) than they have their Dec. 17th high of $108,235.
More important, while the Dec. 5th drop was a rapid liquidity squeeze, this week's drop was driven by spot sellers (meaning long-term investors / low-risk traders who don't use leverage).
This is a bad sign, as healthy markets are driven by spot buyers continually pushing prices higher and higher (given spot buyers are usually long-term minded investors, while leverage traders are high risk gamblers).
The risk here is that markets continue dropping.
Using basic Fibonacci measurements, we've now wicket below the 0.382 level twice since the current run up that began November 5th.
As you can see in the image above, the next level down (the 0.5) comes in right under $88,000. This level is somewhat significant, as it acted as support from November 12th to 15th before Bitcoin climbed higher.
Sadly, four days does not make for strong support.
In addition, we have now pierced the $92,230 level twice (once on Dec. 5th and once on the 20th).
Both times, the market bounced higher almost immediately.
However, if were to begin closing below that level on higher timeframes (starting with the 1 Hour, then 4 Hour, then Daily), the immediate and short-term forecast would start to look pretty ugly.
To make things worse, the shift downward was driven by a release from the United States Federal Reserve about the state of the US economy.
Without boring you to death, the announcement basically said macro-economic conditions would be tighter than expected in 2025.
Translation: Less liquidity flowing into the system.
As you may or may not know, Bitcoin's price movements are highly correlated to global liquidity.
When liquidity increases, Bitcoin tends to go up.
But when it goes down, Bitcoin tends to crash.
And because of that, the Federal Reserve's announcement implied there will be less impetus for Bitcoin's price to go up next year.
So what comes next?
As usual, neither we nor anyone on Earth has a crystal ball that can tell the future with 100% certainty.
And because of that, most investors look to the past to try and predict what might happen in the future. Why?
Because investing decisions are based on human emotions and macro-economic conditions, both of which have historical precedent and can be analyzed to identify patterns.
So here's what we know.
First, Bitcoin started its ascent skywards the week of Monday, November 4th.
Historically, anytime Bitcoin begins to climb in Q4, it runs into trouble during the 7th, 8th and sometimes 9th week after.
Not so coincidentally, last week was week #7.
Meaning, in the context of this particular pattern, the drop is normal.*
*Which is how we were able to predict it in our previous issue :)
View Tweet
More important, as you can see in the tweet above, Bitcoin not only drops in week seven, but after putting in a small bounce, tends to continue dropping weeks eight and nine.
If this pattern holds true, it's possible we have two more weeks of pain ahead of us, with the short-term "low" coming in sometime next week.
This kind of price action makes sense for a variety of reasons.
From the US corporate blackout period (which prevents companies like MicroStrategy from buying Bitcoin), to the fact most Wall Street professionals do not trade during the holidays (creating highly volatile low volume conditions)...
In the short term, it's hard to find any kind of catalyst that could send prices higher in a way that's both sustainable and healthy.
Where things start to get a little more rosey is when we look to the future.
While the rest of the year (and potentially even January) could be rocky, history shows Q1 is highly bullish for crypto.
As an example, here's BTC's performance during Q1 of previous years:
52% (2019)
43% (2020)
111% (2021)
47% (2022, during a Bear market)
83% (2023, exiting a Bear market)
Long story short, Bitcoin hasn't had a negative Q1 since 2018.
Which makes sense, as the crypto market topped in December of 2017 before falling upwards of 80%.
Does this guarantee Q1 of this year will see the same?
No, of course not.
On the one hand, there are TONS of historical patterns that point to Q1 being not only profitable, but potentially explosive.
And with Bitcoin down more than 10% off its highs, and many alt coins down 20-30% or more, the Risk:Reward of investing at these levels is much better than it was one short week ago.
So if you have a bullish bias for Q1, now may be a good time to start Dollar Cost Averaging into your picks.
On the other, when everyone expects the same thing to happen in the markets, it almost never plays out that way.
Which would leave us with a couple alternatives:
The top is already in, meaning prices keep dropping from here
We don't go up or down during Q1, and just consolidate sideways
Instead of exploding higher, prices slowly grind higher
Instead of crashing, prices slowly grind lower
I personally am of the bias we follow history.
Meaning, I personally believe we go lower over the next two weeks, but climb higher (much higher) during Q1.
But like the tweet above says, that's what everyone believes right now.
And because of that, it might not happen!
What matters is doing your homework so you can develop your own:
Market thesis
Risk tolerance
Portfolio sizing
Token choices (based on conviction)
And invalidation levels
On the flip side, making investment decisions because of what some social media guru says (or what some newsletter writers says ;) is both foolish and incredibly risky.
So if you're going to gamble invest into crypto, make sure you know what you're doing and take responsibility for your actions.
Notice the date!
💡 Takeaway: For the first time since it began climbing on November 5th, Bitcoin is facing market weakness. If it can hold critical support levels through January, history says we should go higher. If it begins to break down, however, crypto could slip into a full blown, months long correction. If you're investing or trading, be prepared for both scenarios (and anything in-between!).
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