Bitcoin’s death cross — is it really that bad?

The death cross is a bold term indicating a trend reversal in bitcoin from bullish to bearish. There have been very few such events in the history of bitcoin, but each time they attract the attention of many traders eager to see what this indicator leads to. Today we will talk about the peculiarities of the death cross and the possibilities of benefitting from trading the pattern.

What is a “death cross”?

The death cross is a bearish lagging signal; that is, it serves as a confirmation of a long-term change in the trend of an asset from upward to downward. The death cross attracts the attention of traders in many markets because of its high predictive accuracy — in most cases, this pattern signals a prolonged future decline.

You can see the death cross as an indicator on the Tradingview chart by opening the indicators menu and entering “MA Cross” in the search box.

In the indicator’s settings, set the parameters for moving average periods to 50 and 200, respectively.

Change the scale of the chart to one day (1D). MA intersections will be marked with blue crosses by default. Please note: not every one of them will indicate a death cross — half of the intersections will be so-called “golden crosses”, which we will explain below.

Now let’s explain these intersections in simple terms. The death cross means that the short-term dynamics of the asset price (i.e. the average price over the last 50 days) slows down and drops. This reversal is represented by a 50-day MA. When the line crosses a long-term 200-day MA, this indicates a significant dominance of sellers of the asset in the market over an extended timeframe, making it long enough to indicate a trend reversal.

Utilizing the death cross

However, the strategy of closing a short position after seeing if a golden cross plays out does not always justify itself — MA crossovers are lagging indicators, so you can miss the lion’s share of profits this way.

Death cross vs. golden cross

This signal to buy the asset turned out to be extremely profitable. Over the next two years, its price rose rapidly up to $20,000 (about 8,000% since the formation of the golden cross).

Death crosses on the bitcoin chart

Let’s move on to the most interesting part — the potential benefits and the chance of market collapse after the death crosses. After the first such cross in early 2018, when a full-blown bearish trend began and before the new BTC low in 2019, the cryptocurrency price fell 66.9% before the next golden cross. If you account for the drop up until the next golden cross, the drop reached 52.15%.

The next death cross took place on October 26, 2019, after which BTC collapsed by about 27.8%to the lowest point before the golden cross. Yet, the price levels at the golden cross itself are very close to the ones at the death cross. In this case, using the strategy of closing a short position at the bullish moving averages’ intersection would not bring profit because the cryptocurrency managed to grow close to the point where the short position would have been opened.

Another death cross occurred on March 26, 2020 after the rapid collapse of BTC amid the COVID-19 panic. This cross of the moving averages turned out to be a false signal. Shortly after, the price began to rise rapidly, a new golden cross was formed, and the 2020 bull run began. Opening a short position, in this case, would have resulted in a loss.

Finally, the last bearish cross of the moving averages took place on June 19, 2021. From the formation of the death cross to the yearly low, the price of BTC dropped by almost 21%.

Even though BTC has the highest liquidity among cryptocurrencies, it only has a few years of trading history dating back to 2015. During this period, the cryptocurrency has only had four death crosses on its chart, with one of them turning out to be a false signal. Therefore, 75% of these indicators accurately confirmed the collapse of BTC. After the end of the previous bullish trend, the first death cross showed the greatest returns, with BTC falling by more than 65%. Of course, we can’t draw any confident conclusions with such a small sample size, meaning, even the latest MA cross could be a false signal.

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