Bitcoin is now down 29% from its highs.
That’s the largest drawdown it’s seen since the 2022 bear market and the lowest price since April.
It also puts the cryptocurrency firmly in bear market territory, defined as a fall of 20% or more from a peak.
And the total “altcoin” market cap – the value of all the cryptos that aren’t bitcoin – is down 31%.
It’s entirely possible that crypto could stage a recovery here and make new highs. But from our perspective, the odds are stacked against it.
First, as you can read about in the press, we’re at the end of Bitcoin’s four-year “halving” cycle.
The price of Bitcoin has tended to peak in the winter the year after its regular four-year halving event, where the amount of Bitcoin miners earn as reward for their services is cut in half.
Given that the most recent halving happened in April 2024, that would be right about now.
But far more important, Bitcoin has flipped bearish on its Short-Term Health and Reactive Moving Average indicators.
These are two of TradeSmith’s newest swing trading tools…
Bitcoin has a well-publicized cycle related to its halving events. And all but the greenest of investors are aware of this.
But this knowledge alone isn’t enough to get out while the getting’s good.
The only way to do that is by looking at the Bitcoin market – and every market, for that matter – through the narrower lens of data.
That’s our guiding light at TradeSmith. We spend $8 million a year on our research lab – staffed with dozens software engineers, data scientists, and analysts – to turn mounds of market noise into meaningful signals.
And two of our latest innovations flashed a quantifiable, bearish signal on Bitcoin well before its fall.
The first, Short-Term Health, is an innovation on our classic Health indicator, which measures a stock’s momentum based on its historical volatility. This new version is more attuned to shorter-term volatility, offering more frequent but earlier signals as a trend shifts.
And the second is our Reactive Moving Average (RMA). See, a lot of free tools simply plot an average price over, say, the past 50 days to show you whether a stock is straying from its typical levels. But rather than staying “stuck” at the previous average like theirs, our RMA dynamically adjusts based on a stock’s price moves.
Below are both indicators overlaid on the price of Bitcoin in TradeSmith Finance, the analytics hub where all our tools live.
As you can see in the colored bar along the bottom, the cryptocurrency flipped into the Short-Term Health Red Zone in mid-October, when it was still trading at $115,000. That signal also came after Bitcoin fell below its RMA (dashed blue line below):
Since that most recent Short-Term Health shift, Bitcoin has continued a strong downtrend with the RMA overhead.
If past cycles are anything to go by, this is the kind of selloff that will continue well into 2026. Take a look at this same chart of Bitcoin back in 2021…
Here you can see that the Short-Term Health indicator turned bearish on November 16, 2021, while Bitcoin was trading at about $60,000. That was right after it fell below its RMA, too. And the next year wasn’t pretty:
Bitcoin slowly ground lower from there, hitting a bear market low of about $16,000. That’s a loss of more than 75%.
We’re seeing some recovery in Bitcoin prices as I write, with a quick rally above $90,000. But based on what I see in our data, that’s an opportunity to continue selling.
I’d say that I hate to be the bearer of bad news when it comes to Bitcoin.
But I bore the bad news months ago…
We warned you on Aug. 30 that it was time to scale out of crypto…
Dedicated readers will remember the Aug. 30 edition of TradeSmith Daily, where I stuck my neck out and said that the crypto bull market would soon end.
As I put it at the time:
If you’re sitting on big gains in crypto or related stocks, I don’t think you should go out and sell everything you own right this second. In fact, it’s highly likely we’ll see higher prices over the next six months.
But – when those rallies come – we should sell into each one we see from now until then.
This was weeks ahead of the bearish signals in our data.
But the reason I was so confident in my warning was due to another trend emerging: crypto treasury companies.
These are the companies whose business model is to buy crypto and hold it, speculating it will rise in price and prove a good use of shareholder dollars.
In some notable cases, these companies even take on debt and issue new shares of their stock to raise funds for their crypto purchases. This debt makes them essentially leveraged plays on crypto.
These can be great stocks to trade in a bull market. If you like Bitcoin in a bull market, a company that’s borrowing to buy it should perform even better.
But leverage cuts both ways – when crypto sours, these companies tank.
That’s what’s happening now. Take a look at this chart of Bitcoin along with the premier Bitcoin treasury company, Strategy (MSTR).
As you can see, Strategy has fallen close to double the rate of Bitcoin since the cryptocurrency made an all-time high in October.
Jason Bodner says these “crypto stocks” are a big source of the market rout…
And it’s why he’s stayed so bullish throughout November, even as volatility struck.
Jason made a name for himself on Wall Street as a key dealmaker for storied financial services firm Cantor Fitzgerald. There, he paired institutional buyers with sellers, helping them make big purchases without making big waves.
You may remember Jason’s performance in the Bull vs. Bear debate with Alpha Signals editor Lucas Downey on Nov. 22.
This was after a particularly nasty bout of volatility had taken the S&P 500 as much as 4.3% lower on the month. And Jason’s bullish tilt has proved prescient: Since that video, the S&P 500 has recovered more than 3%.
And in that debate, Jason warned that the bulk of the outflows from the stock market were linked to crypto-related stocks like Strategy and crypto-backed ETFs (funds that allow you to by crypto through your brokerage account).
According to Jason’s money flow data, crypto was the match that lit a short-fused stick of dynamite in the stock market.
Here’s Jason with more…
Crypto is highly levered, lightly regulated, and prone to sharp drops as indebted investors sell to pay off loans. The drop in crypto prices sparked margin calls, which triggered more selling, and amplified the decline.
When traders face steep losses, they raise cash wherever they can, often by selling profitable stock positions.
Jason went on to share this chart of the Grayscale Bitcoin Mini Trust ETF (BTC), one of the ETFs that allows you to buy Bitcoin in the stock market. Each red line on the chart marks a day where Jason’s system detected unusually strong activity – the kind that tends to come from big Wall Street institutions:
What’s coming next? Jason says money is flowing back into stocks in a big way:
With crypto leveraging acting as the spark, traders took profits on stocks to fund losses. But now those outflows have stopped, making room for fresh inflows.
ETF selling pressure has stopped. Elevated trading volumes have collapsed. These are all signs that forced selling has ceased.
Now, you may hear this it’s time speculate on crypto stocks like Strategy. But Jason’s data is flashing a warning. Here’s the Quantum Score for Strategy:
The Quantum Score rates stocks based on fundamentals like revenues, profits, and margins. It also looks at whether institutional investors are buying or selling a stock.
And as you can see, Strategy earns a not-so-attractive 27.6 Quantum Score.
To make matters worse, Strategy short-term Health flipped red on Sept. 3. Until that changes, we’ll be steering clear.
Here’s a trade that’s actually worth following…
Bitcoin and Strategy may be getting all the headlines right now. But that just gives us an opportunity to find great trades under the radar.
One way to do this is to screen for the top Predictive Alpha Prime forecasts.
If ChatGPT is a large language model that predicts the next word in a sequence, you can think of Predictive Alpha Prime like a large numbers model.
We trained it on more than 100 billion stock market data points – including odd jumps and volatility spikes. It learns patterns hidden in the noise, then projects where stocks are likely to move next.
Predictive Alpha Prime projects the price action for 2,334 stocks up to 21 trading days in advance. One standout example at the moment is the forecast for digital storage company Western Digital (WDC).
WDC has the highest Prime forecast in our database. It’s projected to rise 9.5% by Dec. 31, the final trading day of the year. And this pattern has a historical target accuracy of almost 84%:
While the crowd is wound up about Bitcoin and crypto, WDC is a stock to watch over the next 21 days. This lesser-known tech company is benefitting from the AI boom as a premier creator of the digital storage devices that are critical for the massive datacenter buildout going on.
— Michael Salvatore
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Source: TradeSmith
