This has never happened to Bitcoin before. That’s why I buy. | The Motley Fool
For the very first time, Bitcoin (BTC 1.41%) will record its first four-month period of relative strength index (RSI) value below 42. Not only is this the longest period the RSI has been below 42, but it will also be the first monthly close of the RSI Bitcoin below 39. Waiting for some kind of massive price jump, Bitcoin’s November RSI is likely to be around 38, a level it has never seen before.
The Relative Strength Index (RSI) is a metric used to measure the speed and magnitude of recent price changes of an asset to gauge whether it is overvalued or undervalued. It is believed that when the RSI of an asset falls into undervalued territory, it is theoretically the ideal time to buy since the risk of further downside price is believed to be minimal.
Bitcoin and RSI
It should be noted that this does not mean that prices must return to highs immediately. In fact, RSI values can stay in undervalued territory for months. The benefit of tracking an asset’s RSI is that investors can make more informed decisions based on current conditions within a larger historical context.
RSI values range from 0 to 100. Traditional use of the RSI indicates that values above 70 indicate that an asset is overbought, and therefore overvalued. Conversely, values below 30 are usually the measure of when assets are oversold and, therefore, undervalued.
RSI has always been used for stocks, but it can serve a similar purpose with cryptocurrencies such as Bitcoin. Like stocks, we can see how Bitcoin has performed in the past when it hit similar levels. Throughout its history, Bitcoin has gone through a handful of its own bear markets. During these periods, Bitcoin’s RSI fell to levels around the low 40s for months at a time. In the bear market of 2015, the RSI remained in the 40s for nine months. During the last bear market of 2018 and 2019, Bitcoin traded at an RSI below 45 for five months before rallying.
We are now in a similar situation but with some significant differences. Bitcoin’s RSI has been below 43 for six months now, a new all-time high. Historically, past bear markets have been in undervalued territory for about the same amount of time, but never this low. Pending any kind of new price momentum, November’s monthly RSI will be a new high for Bitcoin at around 38. The previous monthly high came in June 2022, when it hit 39.
Will this time be different?
For some, this might sound like a reason to stay away from Bitcoin until healthier levels are restored. However, looking at those past periods where the RSI hit 40s or even 30s, a pattern quickly becomes evident. On average, once the RSI hits its lowest level, it takes about a year and a half before the RSI returns to 70. Once the RSI hits 70, it provides the fuel for Bitcoin to have a serious run bullish, and it takes about 10 months before a new all-time high is reached.
These are just averages, and this time it could surely be different. There are additional circumstances affecting Bitcoin, unlike years past. For the same reasons the stock market struggled, it turns out that Bitcoin is not resilient to fears of inflation and rising interest rates. Perhaps this bear market for Bitcoin lasts longer and is deeper than others.
Even if this is the case, past data shows that Bitcoin is capable of recovering and those with a long-term investment strategy have the most to gain. If this were to be the bottom of Bitcoin’s woes, then based on historical trends, Bitcoin would hit an RSI of 70 by the time of its next halving (May 2024). Once that key level of 70 is reached, past data suggests that a new all-time high could be reached in early 2025.
Hindsight always seems to be 20/20. In each of these past bear markets, critics have written off Bitcoin – yet it still has bounced back. History shows that those who play the long game win the most. Patience and consistency are key in times like these.
RJ Fulton has positions in Bitcoin. The Motley Fool has positions and recommends Bitcoin. The Motley Fool has a disclosure policy.
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