Technical analysts have been pointing out all year that bitcoin is in overbought territory, but that hasn’t stopped its incredible ride since the beginning of 2020.

It’s fun looking back at some of the forecasts made at the beginning of the year, and how desperately wrong they have been, but allowance must be made for the hazards of forecasting something as volatile as bitcoin.

Remember that bitcoin started 2020 at $7 179, and this week traded at $18 380 – a gain of 156%.

In February, when it broke $10 000, the overbought signals started flashing on screens everywhere, then again in September when it punched through $12 300.

Back in July, the options market gave bitcoin a 7% probability of hitting its all-time high of $20 000 by the end of 2020. Now it seems like a virtual certainty.

Bearish signals

Earlier this month, crypto intelligence firm Santiment pointed out that signals of a sell-off event are appearing. One of these signals is the number of daily active addresses (DAA) versus price divergence. DAA is the number of unique crypto addresses interacting with (sending or receiving) a particular coin on a daily basis. These are active users rather than holders, and there is a strong correlation between the number of DAAs and bitcoin’s price action.

A sharp divergence has emerged between the number of active bitcoin addresses interacting with the network, and bitcoin’s price – which is a bearish signal.

Another interesting indicator is social sentiment, which is positive versus negative mentions of bitcoin on social media. Mentions of bitcoin have been heavily weighted to positive in recent months, which is often a signal of a trend reversal. This is not to say bitcoin will drop like a stone, though some correction should be expected as it reaches its previous all-time high of $20 000.

Also notable is the relative strength index (RSI) shown in the graph below, which is now seriously overbought. RSI is a momentum oscillator that measures the speed and change of price movements, and oscillates between zero and 100. The RSI is considered overbought when above 70 and oversold when below 30.

But bear in mind that bitcoin hit seriously overbought territory on the RSI signal on no less than three occasions in 2017, the first time when it hit $5 000. It punched through that level with ease and only corrected on the third RSI overbought level at $20 000. If you sold on the first signal, you would have missed the elevator ride to $20 000.

In a newsletter to clients, Stansberry Research advises treating bitcoin like any other tradeable asset and avoid the hype, being careful to allocate no more than of your investment assets to crypto.

It says one simple strategy for those gripped by the trader’s worst enemy – fear of missing out, or FOMO – is to take some profits when cryptos as a basket (such as that offered by Revix and EC10) rise 10% or more, and to buy when they drop 10% or more. This has proven more profitable than a buy-and-hold strategy.

Another workable strategy is rand cost averaging, which is a way to accumulate bitcoin over time by making regular purchases, either weekly or monthly. Since January 2018, this strategy would have yielded an overall return of more than 50%, notwithstanding the 84% drop in price in December 2017 and November 2018.

Then there are those who see bitcoin at seriously higher levels over the next year, so a buy-and-hold strategy might suit them better.

As Moneyweb previously reported, Citibank head technical analyst Tom Fitzpatrick notes some unmistakable similarities between the 1970 gold market and bitcoin. On this basis, he sees bitcoin at $318 000 by the end of 2021.

This rise will be peppered with “unthinkable rallies followed by painful corrections,” he adds.

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