Banks Collapse, Bitcoin Rallies; Looking At The Charts (Technical Analysis) (BTC-USD)

Thesis Summary

Bitcoin (BTC-USD) is staging an incredible rally following the collapse and posterior bailout of Silicon Valley Bank (SVB). Fundamentally, BTC is benefitting from the renewed hopes that a Fed pause is coming sooner rather than later.

Ultimately, this supports the idea exposed in my last piece on BTC, where I talked about its correlation with liquidity. All paths lead to Rome; in this case, Rome means monetary inflation, which is great news for Bitcoin holders.

From a technical perspective, we have found support at key levels, and this sell-off came with various warnings. While fundamentals certainly play a big role, technicals can often help us predict moves like this and better understand when price action will change.

What is Happening to Banks?

To say that we have witnessed a wild week in markets would be an understatement at this point.

Silvergate (SI) shut down last week, delivering a blow to crypto, something which I already covered here. However, this “crypto bank’s” failure is nothing compared to the collapse of Silicon Valley Bank.

SVB has now been officially taken over by the FDIC, which has assured depositors they will be made whole. SVB fell victim to a run on its deposits, which began after the bank tried to raise capital. This made people panic, and depositors rushed to take their money out.

The bigger issue at play, though is the fact that interest rates have risen so much over the last few years. This hurts SVB, and is hurting other banks, in two main ways.

• Assets on balance are being repriced lower.

• Banks deposits have to compete with short-dated treasuries that are yielding upwards of 4%.

As is common when something like this happens, this bank failure is sending shockwaves through the market, and the word contagion is being thrown around.

Signature Bank (SBNY) is also being taken over by the FDIC and as I write this, trading has been halted for First Republic Bank (FRC) down over 60% for the day.

The collapse of SVB has even taken crypto by storm, with USDC losing its peg over the weekend. SVB was one of Circle’s partners, and so was Signature bank.

USDC recovered over the weekend, after dipping as low as 88 cents. With the FDIC stepping in, Circle should not be in trouble regarding solvency. Liquidity, however, is another issue. Like with SVB, USDC depositors have incentives to retrieve their dollars, especially given the high yields.

Bitcoin Shines Once Again

While the US financial system crumbles, Bitcoin has staged an incredibly impressive one-day rally. Though the world’s premier did sell off on Thursday and Friday, Bitcoin is now back above $24,000.

For those following my work, this sell-off was anticipated, at least to a degree.

A couple of things stand out here. First off, notice how Bitcoin reached a local top just at the $25,000 level. This was a key area of resistance since it is where BTC topped in its last relief rally and BTC failed to break it three times.

Now, the RSI and MACD also gave us clear signals of price exhaustion, which we can see due to the divergence between these indicators and the price. Both the MACD and RSI topped towards the end of January, while Bitcoin’s price kept making new highs.

Already, this was a sign that buyers were getting exhausted. And then, of course, we have our EW count.

I have been playing with some different counts, but this one seems most likely for now. This puts us in wave 4 to complete our initial wave (I) off the lows and assumes a bottom is in.

From a technical perspective, this reversal could have been easy to call. For one, BTC found strong support at the 50% retracement of its wave 3, which is ideal for wave 4.

Bitcoin did dip below this level temporarily, but buyers stepped in exactly at the support offered by the long-term trendline, which we can see in the chart. (The black diagonal line coming down from the left). This trendline came from the BTC top in 2021 and was broken for the first time in January. This was an initial bullish signal. Holding it during this pull-back, as US banking stability is questioned, I’d call it a very bullish indicator.

But this is not the first time we have seen Bitcoin thrive as the financial system collapses around it. In 2013, Cyprus had a massive financial collapse just as Bitcoin was beginning one of its most spectacular rallies.

To wrap up, let’s look at the long-term picture:

Zooming out, we have been completing a corrective ABC structure in a macro wave IV since the beginning of 2021. In fact, I see the top we made in 2022 as an overshooting B wave. Since then, we have completed what could be seen as five waves to the downside, meaning a bottom could be in.

This count, shown in red, would have us bottoming just above $15,000, which makes sense since this represents the 50% retracement of the large wave III. My only issue with this count is that wave IV was quite short, both in terms of price retracement and time.

For this reason, we must also consider the possibility that everything we have seen since July of 2022 has been part of an ABC correction in a large wave IV. This would mean the latest impulse is a C wave, which could take us near the $30,000 area, only to send us back down to new all-time lows.

Arguments can be made for both bulls and bears, but the real test will come as we finish this wave C and begin a retracement. The nature of the decline will tell us which count we are on. If, and only if, we can retrace correctively and then break back above the wave I high will we be able to say with a high degree of confidence that a bottom is in.

The Macro Outlook

Aside from the technical analysis, there are also some fundamentals supporting this rally: the renewed expectations that the Fed could pause its rate hikes sooner. If bad news is good, then financial collapse should be great for stocks.

With that said, we are now witnessing a repricing in rates due to changes in expectations. Thursday last week, expectations for a 50 bps rate hike reached 70%, which has come down notably since.

Add to this the mixed jobs report last week and the Fed pause narrative is, once again, gaining momentum.

In 2007, the Fed also paused its rate hikes, giving us a solid twelve months of stock market rally.

Though a recession seems inevitable, the question is when will it happen? And how much can stocks, and especially Bitcoin, rally until then?

Final Thoughts

Bitcoin is rallying on the back of increased hopes for a Fed pause. Eventually, whether it is because of weak banks, falling housing prices or a recession, the Fed will probably have to turn the printing press back on. Other countries already have. Bitcoin is one of, if not the best, asset to hold in this situation. In a recession, even if the Fed is cutting rates, earnings can fall, and certain sectors can underperform. Just look at how bank stocks are collapsing today. Bitcoin, however, is impervious to this and the perfect way to profit from a Fed pivot/pause.