Bitcoin price is shockingly close to its former 2017 peak, causing widespread panic, fear, and despair across the crypto market. But could the violent move down be a text book zig-zag correction? And if so, what does this mean for the crypto market next?
Despite the narrative from 2020 forward that Bitcoin and cryptocurrencies had matured has an asset class, the recent collapse reminded the world that digital assets remain speculative. Speculative assets are driven by pure emotion, since there aren’t ideal ways to fundamentally price Bitcoin yet. Most on-chain signals remained bullish despite a more than 70% fall from the peak set in November of last year, for example.
Price action might better be predicted based on Elliott Wave Theory, first discovered in the 1930s by Ralph Nelson Elliott. According to Wikipedia, “Elliott Wave Principle posits that collective trader psychology, a form of crowd psychology, moves between optimism and pessimism in repeating sequences of intensity and duration. These mood swings create patterns in the price movements of markets at every degree of trend or time scale.”
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More simply put, bull and bear phases alternate in a predictable manner through what Elliott referred to as “waves.” The theory outlines that markets move up between a motive phase and corrective phase. Motive waves are primary cycles consisting of 5 total sub-waves. Waves 1, 3, and 5 are impulse waves in the primary market trend direction, while waves 2 and 4 are corrective phases. When wave 5 completes, the motive wave (a bull market cycle) moves into a corrective wave (and bear market).
Motive waves can come in varying shapes, and corrections can be downright confusing. However, the latest correction in Bitcoin could be a textbook zig-zag correction, according to how the pattern unfolded from a sentiment standpoint.
The zig-zag pattern is a 3-wave corrective structure labeled as ABC and subdivides into a 535 pattern. The first move down, labeled A, is a 5-wave impulse move based on raw emotions. Wave B is characterized as moving up in this case, sucking in new bullish positions that are ultimately taken out in the C-wave move down. C-waves of a zig-zag are also impulse moves driven by panic and fear.
When they complete, the market can move up again. It is difficult to imagine at this point in the pattern that a reversal is possible given the extreme switch in investor sentiment, but that’s often when recoveries emerge from disbelief.
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Since Elliott Wave Theory focuses on patterns of investor sentiment switching back and forth from bear to bull and vice-versa, the patterns can be used to profit but are typically only identifiable once completed and long in hindsight. Is the recent downward spiral nothing more than a downward zig-zag pattern that might have just come to completion?
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