The Bitcoin Fibonacci Rejection: 1 Point To The Bears
Despite all the ETF hype last Thursday, bitcoin has been “rejected” at a major technical price target: the 0.618 “golden” Fibonacci retracement level. In the past, this has led to more downside for bitcoin. Of course, history doesn’t have to repeat itself here. But if you’re looking for a reason to be cautious, this is one of them. Let’s jump in.
What’s the golden Fibonacci retracement?
A 0.618 Fibonacci retracement is when a price move (up or down) retraces by 61.8% in the opposite direction of the trend. In bitcoin’s case, we can see in the chart below that it dropped by about $54,000 in the last bear market (point 1 to point 2). Since then, it’s rallied by about $34,000 (point 2 to point 3). The $34,000 rally divided by the $54,000 drop is roughly 0.618.
Last Thursday, a series of spot Bitcoin ETFs (exchanged traded funds) started trading on the Nasdaq for the first time in history. As you’d expect, it was a volatile day for bitcoin. Shortly after US stock markets opened, bitcoin ripped $2,000 higher to around $49,000 a coin. But $49,000 just so happened to be near the 0.618 Fibonacci retracement (gold, 3). And as soon as the price tagged that level, it was immediately rejected back down. It then dropped 15% to finish last week below $42,000.
Why does the bitcoin Fibonacci rejection favor the bears?
This isn’t the first time bitcoin has been pushed down at the 0.618 retracement level. It did the same thing in June 2016, and again in 2019. Both times, this led to more downside for bitcoin before the next move higher.
It’s worth pointing out that the June 2016 rejection happened about a month before the second bitcoin halving in July. The June 2019 rejection, meanwhile, occurred almost a year before the 3rd bitcoin halving in May of 2020. Make of this what you will.
In the past, bitcoin has sold-off before each halving event, and then resumed the rally after it. As the theory goes, bitcoin mining companies earn half the fees after each halving, so they tend to sell bitcoin before the event to help cover their future expenses. You can read all about the bitcoin halving here.
Is it time to be cautious on bitcoin?
History doesn’t have to repeat itself here. Some analysts believe the pullback is already over and bitcoin will continue to run. But as Sir John Templeton once said: “the four most dangerous words in investing are: this time is different”.
So from where I’m standing, it makes sense to be cautious right now. That means staying off the leverage and having a plan in case bitcoin starts to roll over from here. After all, big corrections are normal for bitcoin – even in raging bull markets.
If you’d like a quick history lesson on the Fibonacci sequence, watch this video below. I’ve borrowed it from our technical analysis course, which you can check out here.
As usual, none of this is investment advice. It’s just my interpretation of a price chart. But if you’d like to get these interpretations in real time, just subscribe below.
