Recently, many Bitcoin investors have been following with concern the development of a particular chart pattern. A death cross is supposed to predict an upcoming dramatic fall in prices, while others see a bear trap behind it. What do we do with this formation?
Bitcoin remembered the messages of the Eligius Mining Pool on Maundy Thursday and thought, „Let’s form a death cross for once! And so the daily chart of the SMA50 threatens to fall under the SMA100. In concrete terms this means the following: The moving average value of the last 50 days falls below that of the last 200 days. So Bitcoin is now long enough below the mean that the faster one crosses the slower one.
What is a Death Cross?
Let’s say it very soberingly: It is first and foremost a representation of the current situation. For some time now, the share price has developed so badly that it is lower than the moving average of the last 50 or 200 days. He therefore performed worse than the average value of the last seven weeks or the last half year. And it has done so for so long that the average of the last seven weeks has now fallen below that of the last half year.
That is first of all an information about the past and – hand on the heart – quite obviously. In the last half year Bitcoin has put on an incredible rally, which pushed the course up to almost 17,000 Euros. But since January 2018 the course has been falling. The death cross would thus confirm the obvious.
That can be said in principle about different trend lines and indicators. For the sake of fairness, however, it must be emphasized that traders and trading bots often work with such values. The question therefore arises as to whether the market is paying attention to death crosses on a large scale.
A harbinger of further price falls?
Various sources actually see such death crosses as harbingers of a dramatic fall in prices. As the figure below shows, there is an example of this in the course of Bitcoin’s share price:
In the markets beyond the crypto currencies, the death cross or death cross is a standing term. Whether it is such a good signal can be denied, some analysts additionally look at the trading volume, others at other indicators.
Is it a Bear Trap?
Still others, in terms of the current development of the Death Cross, see it as a bear trap, a trap for those who sell nervously or sense a chance for a shorting position.
They point out that a death cross has occurred several times before and has not always led to a dramatic fall in prices:
Of the events in which it looked like a death cross, only one ended in a dramatic fall in the share price – four events since 2013 are therefore only 25%. The death crosses that have occurred in real terms have a similar balance: The figure is 33%, but that is not much more. All in all, the only time that there was a dramatic fall in prices after this death cross is the death cross of 5 September 2015. Other crypto currencies also had death crosses, but did not always fall dramatically.
Now one could sit back, as the representatives of the Bear Trap hypothesis do, and say that there will hardly ever be a dramatic fall in the share price. 25% or 33% risk is not much. One has to admit, however, that three or four events are not good statistics. On the 1h chart, the situation looks clearer:
However, it is questionable whether the behaviour of day traders and swing traders can be extrapolated to that of long-term investors.
What should we do with this death cross?
All in all, the death cross in the area of day candles should be taken for what it is: an indicator that illustrates the poor development of Bitcoin in recent weeks. It is rather out of place to make more of this and now to be afraid that there will be dramatic price slides with regard to the Death Cross.
Your own investment strategy should either work with such signals anyway – whether such strategies are promising for profit can be checked with backtesting if necessary – or, if you are a long-term investor anyway, do not give too much away on such signals. One way or the other: Now out of nowhere you should not panic because of a death cross, dead people live longer.