2 Reasons a Deeper Correction in Stocks May End Bitcoin’s Rally to $8K

The Bitcoin price (BTC) rallied to around $7,300 on April 3, and BTC is still holding onto the $6,700 support level, meaning the price could push the dominant cryptocurrency to the $8,000 area. But, a highly accurate hedge fund manager’s stock market warning could rattle the cryptocurrency market in the short-term.

Dan Niles, the founding partner of Alpha One Capital Partners, said in a note to clients that the dire economic consequence of the coronavirus pandemic could lead to a steeper correction in the U.S. stock market.

With Q2 earnings set to be released in the coming weeks, jobless claims exceeding 10 million, and major European economics in free fall, the appetite for high-risk assets that include single stocks and crypto assets could fade once again.

Fakeout rallies have occurred frequently in 2020

As Cointelegraph previously reported, prominent trader PentarhUdi predicted the Bitcoin price to recover from $5,200 to the 200-week simple moving average (SMA) at $8,500 before it eventually grinds back down to the $3,000 region.

The pattern of a strong rally leading straight to an intense selloff has already been seen multiple times in the past 12 months. This is the result of Bitcoin’s price abruptly surging in a short period of time and shaking out late shorters in the market. This gives whales time to adjust their positions, often leading to a severe correction afterward.

Since late March, the Bitcoin price has broken out of its correlation with the U.S. stock market. Previously, BTC closely followed the movement in the U.S. stock market, going as far as reacting to pre-market trading of the Dow Jones Industrial Average.

As such, even if the price of Bitcoin sees a large upside movement to the $7,700 to $8,500 range in the short term, the price remains vulnerable to a pullback to the $3,000 to $5,000 area.

BTC USDT daily chart. Source: TradingView

Bitcoin’s V-shape recovery makes it vulnerable

The March 12 drop to $3,750 could have technically caused the Bitcoin price to flash crash to zero as discussed by a few industry executives. Fortunately for investors, the price impressively rebounded from $3,600 to $6,700 with barely any pullback apart from a brief wick down to $4,400.

The stock market also demonstrated a similar V-shape recovery as Bitcoin, prompting renowned strategists to predict a deeper correction in the upcoming weeks.

Niles said about the stock market:

“I sort of laugh when I hear people talking about a V-shaped recovery because we are going to have at least 10% unemployment, my guess is closer to 20% before all of this is said and done.”

Liquidated longs remain a threat

The same argument for the lack of strength of a V-shaped recovery in the equities market can be applied with Bitcoin. Given that the cryptocurrency has not established strong support levels during its recovery to the $6,700 to $7,300 range, it faces a risk of a March 12-esque fall where a significant amount of long contracts are liquidated in a short period of time.

A long accumulation phase, in contrast to a V-shape recovery, allows spot volume to grow and actual retail investors to buy into the market, rather than highly-leveraged futures orders affecting the short-term price trend of BTC.