Crypto’s “Meat Grinder” Breakout
“Tech is the dog,” reads a note I tucked away a couple weeks ago. “Crypto is the tail.”
In our quest to demystify this year’s maddening market action, we’ve been thinking at length about what’s behind some of these erratic stock moves.
I explored the idea a few weeks ago that crypto and tech-growth are two sides of the same coin – a Covid Bubble phenomenon that topped out in spectacular fashion in early 2021. Ark Innovation ETF (ARKK) and Bitcoin broke out (and broke down) together. They held hands during last year’s summer relief rally. When traders flip the “risk on” switch, both crypto and tech trades are activated.
Ultimately, I concluded that we don’t know which one’s the dog and which one’s the tail. Not yet, anyway. But several readers – like our friend above – offered their own theories.
Now, this meat grinder market is in an interesting spot.
The downtrodden tech-growth trade sprinted higher to kick off 2023, helping to spark a powerful crypto rally. But the big bounce got a little long in the tooth once the calendar flipped to February, and stocks have since chopped along in a messy range…
Meanwhile, Bitcoin and the rest of the crypto-verse decided to play some mind games. Yes, crypto topped out in unison with stocks heading into January. Then, things got weird. Bitcoin and Ethereum started to slip as stocks chopped along. At one point earlier this month, it looked as if both were about to completely fall apart.
But Bitcoin’s quick 10% drop was nothing but a headfake. A powerful rally appeared out of the blue last week and Bitcoin tagged the key $25K pivot I highlighted back in January.
To review: Tech stocks sparked crypto’s January rally. Now, Crypto is on the cusp of breaking out while the Nasdaq is nursing its second straight losing week.
Leadership hasn’t exactly remained consistent so far this year. But the big crypto lift last week isn’t something we should ignore just because we can’t pin down a precise cause-and-effect relationship between Bitcoin and tech stocks.
Remember, we’ve discussed how Bitcoin bottomed out just below $16,000 in November, then went on to gain 40% on the back of a strong January rally. Now that the market has digested the initial rally off the lows, I can’t stress enough the importance of a legit breakout at these levels.
Because $25K marks the swing highs from last summer’s relief rally that began to fall apart in mid-August. If we witness an actual extension above $25K, Bitcoin will be at new 8-month highs. More importantly, it will officially end the ugly 2021-22 crypto downtrend, providing additional proof that the January rally wasn’t just some fluke.
Breaking the Bitcoin Bear
Can Bitcoin extend above $25K?
As of this writing, Bitcoin is still grinding away just below $25K. The price action is coiled tight following the Feb.15 surge back above $24K – that’s bullish! It’s starting to feel like this breakout could lead to a quick move toward $30K if and when we do get that initial surge higher.
A few other important thoughts to keep in mind as the move plays out:
First, I’m obviously focusing primarily on Bitcoin in this analysis. But Ethereum and other names are also on the move, as well. Since Bitcoin is the flagship, I’m using it as my crypto bellwether.
Plus, Ethereum needs to rally another 15%-plus to sniff its August highs. We’ll see if it can make a run and play a little catch-up if this Bitcoin blitz materializes.
Next, it’s important to note how quickly this rally is playing out so far. I speculated in January that Bitcoin might need more time to churn in a wide range between $20K – $25K before making an honest attempt at a breakout. That still might be the case! But the sheer speed of the move since Jan. 1 shows conviction from these early buyers. We’ll see if it lasts…
Finally, we should keep our eyes peeled for any big, bad divergences between crypto and tech. The stock market limped into the long weekend, with notable weakness in semiconductors and other tech subsectors. The rally’s not in trouble yet. But investors are clearly on edge and the stocks have stayed choppy while crypto rallied into the weekend.
Crypto-adjacent stocks are also worth watching this week as Bitcoin inches closer to breakout levels. MicroStrategy Inc. (MSTR), Riot Blockchain Inc. (RIOT) and Marathon Digital Holdings (MARA) are handy crypto trading vehicles on the equity side. The usual caveats apply. These stocks can move big – higher and lower! They’re probably not great long-term investments. Instead, use them as directional bets once this Bitcoin rally begins to heat up.
Let me know what you thought of today’s article… and if you want any more topics covered by emailing me here.