Overblown Market Fears: Bitcoin Well Within Range and Now Oversold
Despite recent pressures from government sales and Mt. Gox repayments, Bitcoin remains resilient. What are the legitimate downside risks and potential for a rally?
Introduction
In recent weeks, Bitcoin has faced considerable sell pressure from multiple sources, yet it continues to demonstrate remarkable resilience by maintaining within the multi-month consolidation range. The German and US governments are selling off seized bitcoin, right as Mt. Gox announced distributions would begin next month. This also corresponds to the spot ETFs experiencing a string of outflows since June 10, totaling $1.3 billion. Bitcoin has been so resilient, is there still more downside or can we rally from oversold conditions?
Governments Selling Bitcoin
Both the US and German governments have been moving significant amounts of seized Bitcoin to exchanges, signaling their intent to sell. On June 26th, the US government transferred 3,940 Bitcoin to Coinbase Prime, raising concerns about downward price pressure. This transfer represents only a fraction of the government’s total holdings of approximately 213,246 Bitcoin, worth over $13 billion and there’s no sign that this sale will be repeated.
Similarly, the German government recently transferred 750 BTC valued at $46 million to Kraken and Coinbase. The fact that these movements have coincided with the price dip has contributed greatly to bearish sentiment in the market. Yet, the amounts moved are still relatively minor compared to the overall daily Bitcoin trading volumes.
These types of developments are always accompanied by speculation about motives. Are the German and the US governments trying to crash bitcoin? Since these are small portions of the overall Bitcoin holdings of these countries, are they perhaps testing the market reaction for future dumping activity?
These concerns are vastly overstated in my opinion. First, we have Hanlon’s Razor: “never attribute to malice that which can be adequately explained by stupidity.” Second, this is a relatively small amount of Bitcoin compared to what’s been changing hands on a daily basis. For instance, the average spot ETF inflows alone are still at $125M per day, and the total government selling in these reports is $250M. The ETFs flows do not include other major flows from companies stacking in their reserves like Tether, Microstrategy, and Metaplanet.
The third reason this is not likely malicious behavior to crash the price is the liability. While rare, there are cases where the government has been sued for market manipulation or where government agencies have been found to have caused market manipulation. Generally, it is a very high bar to get past sovereign immunity, but there are ways. Internationally, these cases are much more common, with countries suing via the WTO specifically about dumping practices and other international legal frameworks. Lastly, the public backlash from the new Bitcoin voting bloc might be considered a big risk in openly manipulating the market.
Mt. Gox Creditor Repayments and Market Impact
Adding to the government selling pressure, Mt. Gox will begin distributing 142,000 Bitcoin to 127,000 creditors next month. While the typical market participant interprets this as massive selling pressure, I and several other analysts predict that the price impact of these distributions will be minor. Alex Thorn has a great thread on the subject in which he lays out a well-researched case.
Source: @intangiblecoins
Most of the creditors selected for the current dispersion which is considered an “early” payout, but only includes ~95,000 coins, not the 142,000 normally cited. Much of that will go to claim funds or Bitcoinica BK, leaving only ~65,000 to individual creditors. These are likely diamond-handed early adopters, who refused aggressive offers by claims funds over the years in exchange for their dollar value at the time. Also, capital gains taxes provide an incentive barrier to selling. That isn’t to say they won’t be a percentage of individual creditor dumping, but that number is likely to be much lower than the market is pricing in already.
Pressures Overblown: Price Charts and General Discussion
The news of all the potential selling in the last 7-10 days has weighed on the Bitcoin price, but many of these selling pressures have been overestimated. Despite that, Bitcoin’s price has shown remarkable resilience, but we aren’t out of the woods yet.
It tends to be the case for Bitcoin that bullish developments are underestimated and bearish news is overestimated. Take the idea that halvings or the ETF demand can be priced in, when in fact only the estimated or anticipated demand can be priced in. Austrian Economics teaches that we do not know what our subjective valuations will be in the future, moment to moment, under different circumstances. Today, I might say I’d never buy X asset, but when the price doubles and FOMO kicks in, I bend the knee and buy some.
Those are dynamics that cannot be priced in, only estimated. So, again, bearish news tends to be overestimated and bullish news tends to be underestimated prior to the event itself. What is remarkable is we can see this in the charts.
Above, you can see the daily RSI hitting oversold for the first time since August 2023 when SpaceX announced it sold its bitcoin. Before that, the daily hit oversold in March 2023 during the banking crisis, and before that in November 2022 during the FTX collapse. So far, the bounce has not been all that strong, but the probability of significantly more downside is quite low.
There is also a hidden bullish divergence at oversold conditions just like August of ‘23, whose bounce was also not that strong. Strong consolidation in a range, hit oversold on a hidden bullish divergence and then rally.
I’d challenge anyone to point to the massive new selling pressure that has come onto the market in the chart above. Much more likely is that expectations have become overly bearish, represented by the oversold conditions.
Zooming in to examine the bounce in closer detail on the 4-hour chart, we can see this bounce still has not cleared the original level. It will then face the 50-period MA before the final level to consider the bounce confirmed at $63,500. Therefore, the chance we could return to the lows before finally resuming the uptrend is still real. That would set us up for a traditional bullish divergence on the daily and more jet fuel in the tank.
Lastly, checking out some important levels on the daily chart, we are still within this very large multi-month consolidation range and supported by the 200-day, but I’ve plotted several moving averages that are coalescing around the same resistance zone. It is going to be quite difficult to quickly break above this level on the chart.
Conclusion
Recent revelations about government sales and Mt. Gox repayments have been overestimated, pushing market sentiment to an unwarranted bearish level. Despite all these factors, Bitcoin has been able to stay in the consolidation range and hit oversold on the daily RSI. This typically markets a significant turning point for price by triggering a response from algorithmic and technical traders. Once again, bearish news has been overestimated by the market. Historical instances of similar patterns, such as the SpaceX sell-off last August and the March 2023 banking crisis, show oversold conditions marking local bottoms.
While Bitcoin is not out of the woods yet, it is in a much more stable position than current market sentiment estimates. There is a chance of a marginally lower low, but the downside risk is limited. A fast recovery over the next week also looks unlikely due to significant resistance above the price.
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