Has the Crypto Market Bottomed Out? Measuring Fear.
The crypto markets have dropped around 50% since reaching record highs in April. This was yet another huge and incredibly fast drop in value. Played properly, though, corrections like this set up strong opportunities, especially for long-term investors.
Is now a good time to buy back in?
It’s very difficult to call the bottom of a particular cycle, but looking at our data, we can say two things:
- Fear has set in.
- The market is likely not yet ready to turn back around.
The end of a crash tends to have these characteristics:
- Price extending quickly below recent levels.
- Negative press coverage, with titles such as “Bitcoin is finally dead,” “Sell Your Bitcoin and Never Look Back,” and “The End is Here for Crypto.”
- The exit of retail traders from the market.
- Reduction in speculative, leveraged trading.
These negative-sentiment ingredients tend to signal the end of a bear market and the start of a bull market. The seasoned pros are buying back in while everyone else has given up.
The best time to buy is when everyone else is panicking.
What the Crypto-ML Market Index tells us
The Market Index has just been heavily upgraded to pull in many more data points, attempting to monitor the characteristics noted above. Specifically, the Market Index now consumes the following variety of data points to determine its score:
- Exchange data: such as price and volume
- Technical data: such as momentum and moving averages
- Social media data: such as Twitter sentiment and volume of discussion
- Search trend data: such as quantity and type of search queries
- Dominance data: how Bitcoin compares to altcoin market capitalization
These factors come together to paint a picture of just how extreme the market may be. Here’s a snapshot of the Market Index as of June 1:
Looking at the chart, you can see that when the Market Index exceeds +80, it’s a warning sign that the bull run may be nearing a peak. This happened at points 1, 2, and 3.
You’ll also notice points 4 and 5 signals a new bull market may be in the making.
As of today, the Market Index is around -60. This means:
- It still may need to fall further before we start a new bull cycle. Perhaps the drop needs more time or a further price reduction.
- According to our aggregated data, people are fearful, but they have not yet entered full panic.
Limitations of this data
In the history of cryptocurrency, there have only been a handful of large trend reversals. But with machine learning and statistics, you prefer to have thousands of samples of the events you’re trying to predict.
As such, we have a limited understanding of when the crypto markets will actually reverse. We instead look at commonly accepted factors that have led to reversals in numerous other financial markets.
That said, please consider the following:
- The trend may reverse without first crossing -100.
- The Market Index drop below -100 but price will continue down, possibly to zero.
The Market Index shows fear has definitely set in with the cryptocurrency market. Depending on your goals, this may be a great buying opportunity, especially for long-term positions.
- You could wait to consider buying until the Market Index drops below -100.
- You could begin adding to your long-term positions each month the Market Index is negative.
If you have questions, let us know in the comments below!