Beware of Bitcoin Bull Traps

Bitcoin price has struggled over the past month and has slowly started to consolidate lately. This development should lead to a slight downtrend before the direction is determined. Investors need to be cautious as the two key on-chain indicators suggest this move could be a bull trap that will most likely take BTC to crash.

The price will withdraw?

Bitcoin’s price action is causing the Fair Value Gap (FVG) to underperform.

Between February 3rd and February 5th, it rose by 15%. Currently, this gap is eventually filled as the asset trades lower and fills it. Therefore, the price is likely to drop even more in the next few days.

Additionally, the presence of a 4-hour demand zone extending from $38,006 to $39,332 suggests that this pullback is likely to be capped at $38,000.

BTC/USDT | Source: TradingView

This bearish forecast is further supported by the decline in the amount of BTC held by Grayscale Investments from 644,000 to 643,000 since Jan. 18. This is a sign that wealthy organizations or individuals are reducing their investments.

While these data are not overly worrying, when combined with data from the CME they show the bigger picture.

Beware of cow traps

According to CME data, since Feb. 10, open interest (OI) for BTC is up 5.33% from $2.25 billion to $2.37 billion. In contrast, trading volume fell by 55.27% over the same period, suggesting that the market is overly leveraged.

Therefore, a short-term surge in selling pressure is likely to trigger a quick sell-off. Interestingly, this outlook coincides with forecasts from a technical perspective.

Total volume of open interest and bitcoin futures Above CME | Source: Skew Markets

The market value to real (MVRV Z-Score) further underlines the pessimistic situation of Bitcoin. Especially at the time of writing, it hints at the possibility of moving further south. This on-chain indicator is used to determine if BTC is oversold (i.e. quite overvalued) or overbought.

The blue and red bands have historically marked the top and bottom of the cycle, respectively. At the time of writing, the MVRV Z-Score is hovering around 1.53, much higher than the red band. This suggests that the sell-off is likely to push this level into the red band, marking the bottom of a long-term downtrend.

MVRV Z-Score belong Bitcoin | Source: Santiment

Therefore, investors need to be cautious as the BTC price does not appear to have bottomed yet and a short-term move down could be imminent. If this prediction comes true, altcoins will also feel the brunt of the sell-off and potentially suffer a similar fate. Therefore, market participants need to be cautious ahead of the weekend sell-off.

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