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Bitcoin (BTC) had handed over its leadership mantle of the entire crypto sphere to Ethereum (ETH) in the run-up to the much-anticipated merge event last week, leading to a veritable fervor among Ethereum enthusiasts who salivated at the prospect of snatching the proverbial crown in what came to be known as a “flippening” event. Alas, such dreams proved to be built on a shaky foundation of “hopium” rather than any intrinsic tailwind, with Ethereum’s price now crashing along with the rest of the crypto sphere and tanking Bitcoin’s short-term prospects with it.
#ETH selling off post merge
The network isn’t being used the same way it was in 2021
There was little reason for ETH to sustain it’s price
Switching to PoS doesn’t matter if the network isn’t being used
When high network usage returns, so will the price: https://t.co/o0RjKGB0Wd
— Matthew Hyland (@MatthewHyland_) September 18, 2022
As we described in detail in a previous post, Ethereum needs high demand in order to turn into a deflationary asset, thereby an intrinsic impulse for a sustainable price pump. Bear in mind that Ethereum’s burn rate is directly determined on the basis of network activity. However, that 2021-level demand is nowhere to be seen. And this is why Ethereum has struggled to maintain its elevated price in the post-merge phase, setting the stage for a broad-based crash in crypto prices, including that of Bitcoin.
As is evident from the chart above, Bitcoin is perfectly respecting its medium-term bearish trendline and is about to enter a critical support zone. Should the world’s premier cryptocurrency breach the upper bound of this zone and enter this critical area, it will have formed a new year-to-date low. Moreover, if Bitcoin then breaches this support zone, the next major pivotal area then comes into play in the $12,000 to $14,000 price range.
#BTC forms this symmetrical triangle and the downside continuation from the rejection continues
In fact, $BTC is threatening to breakdown from this symmetrical triangle altogether
— Rekt Capital (@rektcapital) September 19, 2022
We’ve noted a number of times that Bitcoin typically crashes around 80 percent from its preceding all-time high in bear markets. Based on the peak of around $69,000 that Bitcoin recorded back in November 2021, the cryptocurrency will have to hit a price of $13,800 to satisfy this bear market phenomenon. Incidentally, this price falls just within the critical support zone identified in the chart above.
Moving ahead, on the 13th of September – when the last Commitment of Traders (COT) report was published by the CFTC – Bitcoin swap traders hit their maximum short position in a 1-year timeframe. As a refresher, swap dealers allow large investors to hedge their risks by entering into a series of swap agreements. Given that these dealers were net short by 2,062 BTC contracts on the 13th of September, it shows the rampant fear in the market just ahead of Ethereum’s merge event. As a refresher, the swap dealers’ short position indicates heightened hedging activity by large Bitcoin investors.
On a related note, leveraged money is 67 percent short on Bitcoin. This category is important in dictating the near-time bias of Bitcoin’s movement. It should be noted, however, that with a net short of just 3,625 contracts, leveraged money was the least bearish this year on Bitcoin while heading into the merge event. Nonetheless, given the current carnage in Bitcoin’s price, we expect to see a large bearish tilt for leveraged money in the next COT report that comes out tomorrow.
Finally, we note that Bitcoin’s correlation with Nasdaq futures remains elevated, currently hovering at around 86 percent. Given the upcoming FOMC meeting on Wednesday, this level of correlation does not bode well for Bitcoin’s short-term prospects.