News about a lawsuit against Tether and Bitfinex result in a 400$ price drop of Bitcoin and increased uncertainty

Bitcoin has been in a strong uptrend ever since the price made a higher low on the 8th of February at around 3350$. Alongside with the crypto king, many altcoins have shown positive indicators, reaching prices we haven't seen in months. Ethereum (ETH) at the current peak of the rally reached a growth of almost 100%, Litecoin (LTC) a growth of 300% and until 2 weeks ago it seemed that Bitcoin combined with strong uptrend on altcoins will have no trouble reaching the most important zone throughout this bear market which stretches from 5800$ to about 6500$. This zone has provided a strong support in forming a descending triangle pattern and the price of Bitcoin found buyers and bounced strongly 5 times throughout an 8 month time period in 2018. However, by breaking the support and confirming the descending triangle (bearish) pattern, we have seen new lows which we are still recovering from.


 Descending triangle formation on Bitcoin


Although the crypto market has put up a strong rally, there was and is no reason to get one's hopes up just yet as the previously mentioned zone is expected to become one of the heaviest resistance zones in the history of Bitcoin, following the saying "previous support tends to become new resistance". A break of a powerful resistance at 4300$ and further movement to the upside has resulted in the market sentiment becoming much more positive, which was projected in the Crypto greed & fear index as well. The latter is one of my favourite indicators which takes into account market volatility, surveys, social media analysis etc. and gives a nice preview of the market sentiment, flashing warning signs when people are overly optimistic. We can see that optimism has prevailed in the last few months and even weeks although we were approaching the significant resistance zone on Bitcoin.


Source: https://alternative.me/crypto/fear-and-greed-index

When just about everyone was convinced 6000$ is going to be tested, we have witnessed a strong movement to the downside. There are several factors to take into consideration which would lead us to be very cautious, such as high valuation on the Crypto greed and fear index, limited potential for long trades, approaching strong resistance and especially altcoins not performing well at all in the last few weeks.

However, there has been a strong catalyst to the crash in a form of a FUD (fear, uncertainty and doubt) article published on many websites, including the Wall Street Journal. One of the leading crypto exchanges, Bitfinex, and the affiliated firm Tether (the company behind the stablecoin with the same name) are being sued by the New York State Attorney General. The 23-page document from the Attorney General's office states they have a reason to believe an ongoing fraud is being carried out by the exchange and Tether. The firms are said to have engaged in "undisclosed, conflicted transactions to cover Bitfinex's losses by transferring money out of tether reserve funds". Furthermore, the lawsuit also claims Bitfinex partnered with Panama-based payment processor Crypto Capital to handle customer withdrawals after struggling to find a reputable bank to work with. Additionally, Bitfinex also commingled client funds through Crypto Capital, meaning the firm mixed funds held on behalf of clients with its own capital.
The news had an immediate effect in a form of increased fear in the markets (also shown in the fear & greed index), causing the price of Bitcoin to fall almost 10%. Currently, the effect is easiest seen in a form of divergence between the prices on Bitfinex and other exchanges, which is around 5%. It is still too early to say what further implications the article will have on the price of Bitcoin, but it is safe to say that it did play a significant role in the dump seen yesterday.

An interesting fact may be that the last time we have seen Tether FUD articles (which have appeared multiple times throughout this bear market) posted back in November of 2018, many people panicked and bought Bitcoin with their USDT, causing the market to go up significantly before crashing back to its previous price in a matter of hours. This move was so sudden and vicious that it created a wick candlestick on Bitfinex going all the way from 6300 to 7800$. After the described move the market stagnated at 6300$ before breaking the before mentioned support and making new yearly lows.


Previously mentioned movement of the price of Bitcoin on Bitfinex exchange

 
Going on to technical analysis, there are few things I would like to mention.

We have now found ourselves in an interesting territory where Bitcoin has fallen to its 21 day EMA and is trying to find support. The altcoins have'nt shown the strength needed for a further move upwards just yet and most of them have fallen below their 21 weekly EMA, which is one of the most important long term trendlines. If the support at 5000$ is broken for Bitcoin, we could expect further movement to the downside with our next target at Bitcoins 21 weekly EMA, which currently stands at around 4600$. The ongoing rally of the last few months is the first one to have reached (and went above) the mentioned average in quite some time. Finding support on that trendline would be crucial to resume bullish movement and perhaps increase the chance of the bear market being over. If we, however, break that important support, we could be looking at another strong move to the downside with potential new lows in this bear market. For the bullish scenario, we would need to either find support at the level we are at currently or at the 21 weekly EMA of Bitcoin. By finding support I am not only referring to those trendlines holding, we would need to see buyers stepping in and showing interest by increasing the buy volume and consequently creating a strong bounce at the mentioned levels. If we do in fact see that happening, we would firstly aim for a double top at around 5600$ on Bitcoin and further movement to the resistance zone between 5800 and 6500$. Only breaking those levels and holding the price above them would significantly increase the chance of the bear market being over.

When looking at the weekly Stochastic RSI, we can notice that it has been in the overbought territory for quite some time now. Although there is no certainty that overbought RSI levels mean the prices need to drop, however it is something I am keeping my eye on and is telling me long positions present a high risk setup.


21 weekly EMA (in orange) acting as a resistance throughout the whole bear market, bellow we can see the overbought stochastic RSI


Before I conclude, another important thing I have noticed in the charts is that we have fallen below an upwards sloping support trendline on the daily RSI (relative strength index) which has been our support ever since the start of the rally in December.


 

The deciding point we are at is one of the most exciting trading opportunities traders have had in the last months. Many will end up on the wrong side of trades so be very careful when trading. I wish you a lot of success and if you enjoyed the blog, hopefully you will be back for more of my content.

M.F.
 
Our technical analysis behind the article can be found HERE!
 
Disclaimer: This is not financial advice. Always do your own research before investing and/or trading. Cryptocurrency markets are extremely volatile and thus should be approached with caution. Make sure to limit your exposure according to your risk profile.

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