Can Bitcoin still see year-end rally?

|2nd Dec 2021|
While Bitcoin has performed well this year (up 102% since January 1st), it’s fair to say that its performance in recent weeks has disappointed many, including me. After breaking out in early October and pushing back towards its highs, price action has since struggled, with two failed breaks at new highs and the resulting selloff producing very bearish price action through November. So, what about the famous 'end-of-year' rally everyone has been talking about? Have we peaked already? In short, No.

My plan for crypto this year was for the market to perform very well, putting in a major high in April, followed by a major low in July, and to end the year at a new major high in early-mid December (following the seasonal pattern). Up until a few weeks ago that plan was very much in play and the year-end rally was all that was needed to complete this pattern at around $120,000-$135,000, and I was planning to close 70% of my crypto portfolio at that point. 

October saw a couple of things change however, that has seen bitcoin deviate from this plan. First, was the fact everyone was talking about an end-of-year parabolic move. I don’t like it when everyone is expecting something to happen, it’s a sure-fire sign it definitely won’t. Now you might think that if everyone wants it to happen then it should be self-fulfilling, but the problem is if everyone is sitting on the sidelines expecting someone else to produce a rally, who is actually going to do the buying to cause it? We need FOMO in order to fuel parabolic moves and these moves come unexpectedly for most, hence the FOMO driven rally. 

Secondly, was the introduction of the first Bitcoin ETF on October 19th, and again, this might seem like a positive, but things like this tend to have a negative impact for the same reason as above, everyone expects it to rally so it surely won’t. You only have to look at what happened when Bitcoin futures first started trading on December 18th, 2017, we made a high not seen again for 3 years.

So, with the changes since October, why is it I still believe this crypto rally isn’t over? Well simple, it’s down to how insiders and funds have positioned themselves following the recent drop to $54,000. In short, what we are seeing now is that crypto insiders (commercial traders) have been buying and funds (Non-commercial traders) are being forced to buy this dip, driven by demand for the ETF. 

Let me explain more using the graph below. 

Bitcoin CoT data

Above we can see the latest CoT data for Bitcoin and in it, we can see some very interesting developments that occurred during the current correction. Firstly, look at the COMM positions (middle graph), these are commercial traders that operate within the crypto industry and know more about it than anyone. These guys use markets to hedge future moves so if they are buying it's because they see the next move going long, and if they are selling it's because they see the next move going short. If we look at what they are doing now, they are buying, almost an all-time high amount, and also exiting some of their previous shorts. This tells us they don't see the need to hedge for a decline and are focusing on the next move up. 

Then let's look at the funds (bottom graph). These traders have always been Net-short Bitcoin as you can see from the red line (shorts) always being above the green line (longs), but these lines are about to cross, and this will be big. Funds tend to be trend followers and if these traders are forced to buy Bitcoin futures because of institutional demand for the ETF, they will have to go Net-long (green above red) and this will be a very bullish condition. 

Finally, what I haven't included in this image is what retail traders have been doing. Predicably they went all-in with their largest long position ever on the initial launch of the ETF 6 weeks ago, (like I said, if everyone expects it to go up, it surely won't) and have now been driven out by the current correction and have gone net-short for the first time ever. (Check out the retail graph for yourself, it's really quite something). We never want to be doing the same as the retail heard and them going all in 6 weeks ago was not a bullish sign, which and I discussed in our weekly webinars. Now, however, with them running for the hills, while insiders are buying and funds are forced to load up, Bitcoin can still have a very good end to the year, if positions continue on their current path. 

Keep a close eye on the upcoming releases of new data on our website to make sure insiders remain bullish and of course to see if funds do indeed go Net-long. If we can do this, $100,000 is still a reasonable estimate for year-end. As this stands we are seeing the beginning of bullish conditions that could see a break back above $60,000 soon, this is when I will take action, and look to be a buyer once again. 

|By Ray Gilmour|