- Getting out before a crash is the holy grail of trading a Bitcoin market cycle
- Being able to predict a market top is a combination of fundamental and technical factors
- Crypto trader Jacob Canfield recently tweeted a selection of technical indicators of a Bitcoin top
Judging the top of a Bitcoin market cycle is the stuff of dreams – cashing out at the right time is the most important part of trading, especially as we know how much Bitcoin can fall after topping out. This is of course a notoriously difficult thing to do, but there are metrics out there that can help you judge when Bitcoin might be topping out. Signal Profits founder Jacob Canfield recently offered his own indicators to spot a market top on Twitter, which we will run through in a bit more detail so you can understand why they are important.
Everyone is expecting a major crash for Bitcoin.
Before a crash, you’ll get early warning signs.
Whale ratio on exchanges will go up
Miner inflow’s will go up
Exchange reserves of Bitcoin will go up
Extreme positive funding
Currently, none of these are at warning levels.
— Jacob Canfield (@JacobCanfield) November 14, 2020
Whale Ratio on Exchanges Increases
This refers to the direction of flow of bitcoin between wallets of whales (large holders of Bitcoin) and exchanges. A large flow of bitcoin from wallets to exchanges shows that whales are preparing to sell, whereas an increasing flow of bitcoin from exchanges to wallets means that buyers are taking it off exchanges because they don’t want to sell.
Miner Inflows to Exchanges Increases
Similar to whales, Bitcoin miners who have been hoarding bitcoin will start sending to exchanges in order to sell. We saw in June that an increased flow of bitcoin to exchanges from miners often precipitates a selloff.
Exchange Reserves of Bitcoin Go Up
This stands to reason given the first two indicators, but can act as an indicator on its own. We saw bitcoin leaving exchanges at unprecedented levels last year, which went hand in hand with the incredible price rise. The same is true with inflows – an increase in bitcoin heading back to exchanges, from any source, suggests that a selloff is about to be triggered.
Extreme Positive Funding
‘Funding’ relates to futures trading. When the funding rate is positive, the price of the contract is higher than the mark price, leading to traders who are long paying for short positions. On the flip side, a negative funding rate indicates that contract prices are below the mark price, which means that short positions pay for long positions.
In terms of the Bitcoin price, a negative funding rate means there is a good chance that the price will continue to rise while a positive funding rate suggests it is likely to fall. Similarly it’s also worth paying attention to the 24-hour change of the funding rate to determine a potential shift.
It should be noted however that when the spot price is trading $75-$100 above derivative prices, derivatives traders are forced to pay significant fees to hold open positions. Therefore funding rates aren’t as important.
Bitcoin Market Tops Have Social and Technical Telltale Signs
These are some of the more technical ways of being able to determine when a Bitcoin market cycle may be coming to the end, but there are other more social indicators you should look for before you go selling your precious bitcoin.