One of the most challenging tasks cryptocurrency investors face is how to spot crypto market bottom. Bitcoin has seen its value rise to a record high of $64,990, but where the digital currency is headed next is an open question. Crypto market experts believe that a market crash is imminent and cryptocurrency investors should be prepared to watch for indicators of a market bottom.
Market bottom is the lowest point in price for a security over a given time frame before a new uptrend has started. In 2018, crypto hit market bottom after an unprecedented boom-and-bust cycle also known as the Great Crypto Crash.
Timing market bottoms is a daunting task, but you can reap huge profits by buying low and selling high. Stock investors have earned huge profits since the COVID bear market bottom. Hunting for a bottom has also benefited oil traders who bought the bottom after the historic oil price crash of 2020. The crypto winter of 2018 also rewarded HODLers and crypto enthusiasts who bought the bottom. That’s what “buying the dips” investment strategies are all about.
The key takeaway is that no one can time market bottoms with 100% accuracy. However, there are some technical analysis methods, chart patterns and other ways to tell if the cryptocurrency market has bottomed.
We’ll outline the signs you need to pay attention to if you want to spot a market bottom, along with 5 trading strategies to hunt for a market bottom.
What is Market Bottom?
In technical analysis, a market bottom is when the price of a security starts trending upward after trending downward. The market bottom is recognized as being the lowest price point of the prevailing downtrend.
This shift in the market sentiment, from bearish momentum to bullish momentum, is used by crypto traders to hunt for reversal trades. The most common way to identify trend reversals is by using indicators and oscillators to spot overbought/oversold conditions in the market.
5 Ways to Spot the Market Bottom
Market pundits love to say that trying to catch a market bottom is like trying to catch a falling knife. However, catching market bottoms is not as dangerous and risky as you might think. Paul Tudor Jones, one of the most successful hedge fund managers, has this to say about catching tops and bottoms:
“I believe the very best money is made at the market turns. Everyone says you get killed trying to pick tops and bottoms, and you make all your money by playing the trend in the middle. Well, for twelve years I have been missing the meat in the middle but I have made a lot of money at tops and bottoms.”
This helps us debunk myths of technical analysis which say that attempting to catch market bottoms is impossible. While no one knows when a market crash will end, we can learn the signs of institutional buying at the market bottom.
First, investors seeking to capture a market bottom should look for clues as to how volatile the market is. In the stock market, the CBOE’s VIX index — also known as the Fear and Greed index — is a popular indicator used to confirm major market bottoms.
A direct way to measure the volatility of crypto asset price fluctuations is to use a VIX-like volatility index for Bitcoin (BTC). The BitVol index is a real-time index that displays the market sentiment. In other words, this is the Bitcoin version of the Fear and Greed index.
In the stock market, there is an inverse relationship between the fear index VIX and the S&P 500. As a general rule, higher VIX levels normally reflect a higher level of fear. Subsequently, the market sentiment is bearish. When the VIX index tops, it signals that the fear is fading. This is also an early sign that institutional investors are reassessing their view of the market.
*Note: BitVol, the new Bitcoin volatility index, was launched by T3 Index and offers investors opportunities to trade on new derivatives instruments.
In the same way, the fear index can help crypto investors confirm a bottom in the crypto market. At its peak during the COVID-19 outbreak, the BitVol index topped out at 190.28 on March 16, 2020. This marked the bottom in the cryptocurrency market and the end of the 2018 bearish market.
Sector Characteristics and Market Cycles
Another way to identify market bottoms is to pay attention to the different cryptocurrency market sectors. In the same way, the stock market is divided into sectors, likewise, cryptocurrencies can be divided into different sectors.
A cryptocurrency market sector is a group of cryptocurrencies that have a lot in common and are characterized by offering the same type of utility. For example, privacy and anonymous cryptocurrencies (Monero, Zcash, Verge, etc.) can be considered a sector.
We can identify other crypto market sectors, such as:
- Stable coin sector — includes coins like Tether, USD Coin and Paxos Standard
- Exchange-based coin sector — BNB, KuCoin and OMG
- Gaming rewards sector — Storm and GameCredits
- Application platforms cryptocurrency sector — Ethereum, Cardano and EOS
- Digital voting sector — Vote coin
In other words, the cryptocurrency you own belongs to a specific sector. Typically, cryptocurrencies within the same sector will tend to move in tandem. The cryptocurrency market and individual crypto sectors will not move in the same direction all the time. Identifying which sector your crypto belongs to will help you pinpoint in advance when the market is about to bottom.
For example, if both Bitcoin and Ethereum prices trend downward, but one of the two fails to make a new low while the other makes a higher low, that divergence can be a sign of a potential bottom. Most of the time, these price divergences are powerful reversal trading signals.
The key takeaway is to always compare the price of your favorite cryptocurrency against the price of another cryptocurrency which is part of the same sector.
Big market ‘travel’ days
The big market travel day is a type of volatility pattern in which the price moves up and down a lot, all within a single trading day. These volatile trading days signal that the market is near a turning point. However, they don’t reveal who won the battle between bulls and bears. The trading signals only warn market participants of an imminent change in the trend direction, but it doesn’t tell in which direction.
For example, if the Bitcoin price drops $5,000, rallies $5,000, and then falls to close down $8,000, we’re potentially dealing with a big market “travel” day. During this type of market scenario, the most likely outcome is that sellers are getting washed out.
Other trading signals that your cryptocurrency is ready to hit bottom are intraday reversals. These occur rather quickly and are easily identified. On the price chart, intraday bullish reversals occur after the market dips and, unexpectedly, buyers take control of the market to the point that they are able to turn a big losing day into a positive day — even if that’s a small gain.
*Note: On the daily time frame, this type of intraday reversal will resemble a Pin Bar pattern.
When the market starts to bottom, the first signs of reversal will be visible on the intraday chart. From there it will spread on the higher time frames. Thanks to the attractiveness of online charting platforms and the accessibility of advanced tools for charting, we can spot these intraday reversals.
Look at cryptocurrency technical indicators such as Stochastic, RSI, MACD and other oscillators showing oversold and overbought trading conditions. On its own, the intraday trading reversal doesn’t carry a lot of weight. But when we combine it with other technical factors, it can be more reliable.
On the same Bitcoin chart, we applied the MACD indicator to attain a confluence of signals which can increase your odds of winning trade.
Check our technical analysis for beginners guide if you want to learn the ropes of reading a cryptocurrency chart.
Keep Your Ears on the Street
Last but not least, you can tell when the market is bottoming by keeping an ear open to what the retail crowd is doing. When it comes to forecasting market trends, the crowd is not always so wise. The retail crowd loses money because its market assumptions are not supported by the crypto market environment.
Due to the herd instinct, retail investors tend to buy similar cryptocurrencies solely because other investors are buying them. Unfortunately, retail investors tend to take whatever they see on TV or read on social media as gospel.
There is an entire school of thought that deems charting lines as random. In other words, some investors believe that technicals don’t drive the price, but rather human emotions (fear and greed). These types of investors are known in the financial world as contrarians.
Contrarians profit by going against the retail crowd. Evidence shows that trading against the retail crowd performs well at market turning points — tops and bottoms.
For example, every time Bitcoin price plummets, all the crypto doom and gloom prophets crawl out of the woodwork. They subtly instill fear, causing many retail investors to sell. When the sell-side becomes overcrowded and the fear dissipates, naturally the market will bottom out sooner rather than later
Cutting through the doom and gloom can be extremely helpful. But in order to do that you need to “listen to the street,” and use it as a contrarian indicator to time market bottoms.
The bottom line is that for the inexperienced trader, hunting for bottoms is a risky proposition. Even professional traders don’t have a 100% foolproof method to spot market bottoms. You’ll likely be a better trader if you simply, buy the dip.