Bitcoin price holds at $55,000 despite some bearish indicators

Veteran analysts and media outlets including Cointelegraph have recently highlighted indicators that suggest Bitcoin (BTC) prices may be overextended.

These bearish views include that of Bollinger Bands creator John Bollinger, who advises traders to use trailing stops as signs of a "top" are forming.

However, it is worth noting that Bollinger Bands and the Fear and Greed indicator are backward looking indicators. Therefore, whenever there is a 30% weekly rally, such as the most recent one, these indicators usually reach overbought levels.

As crypto analyst TechDev_52 rightly questioned, we have no way of knowing if we are entering a huge potential pullback or a sustained uptick.

Now you know why they call it a bear "trap". This is very convincing.

How do you tell the "trap" from the "top"? One is round and the other is pointed.

Which one do you think this looks like?

— TechDev (@TechDev_52) May 16, 2021

For example, popular youtuber and trader Nebraska Kangooner pointed out that the recent top of $56,000 may be the upper limit of Bitcoin’s bullish channel from late July.

#bitcoin

OBV is rising, but still not fully broken out.

hit the top of the channel.

Would like to see a bullish consolidation at the high of the range leading to a breakout of OBV and simultaneous price breakout for a bullish continuation.

— NebraskanGooner (@nebraskangooner) October 6, 2021

"Greedy" mode can persist for weeks or months

Going back to the "fear and greed" indicator, here are some examples of how this indicator can maintain overbought levels for more than three to four weeks.

Note that between Jan. 29 and Feb. 26, the Bitcoin Fear and Greed Index has remained above 65, indicating overconfidence among traders.

This indicator uses volume, futures open interest, social indicators and search data to calculate market excitement.

As a result, it took four weeks for Bitcoin prices to see a sharp correction after the warning signs emerged. Whoever sold in the first few days after the indicator flashed missed the subsequent 70% gain.

A similar situation occurred between July 23 and August 25, as the price of Bitcoin continued to rise. Yes, there will always be a pullback at some point, but what about weeks or months away?

Bollinger Bands, a good short-term indicator

John Bollinger is an experienced and respected trader, but his indicator is a moving average plus some bias based on current volatility. In short, considering Bitcoin's typical daily volatility of 4.5%, a weekly volatility of 30% is outside that range in most cases.

Of course, when Bitcoin breaks out of the upper Bollinger Band, there are often minor corrections, but this is completely irrelevant to the price in the next two to four weeks or so.

Funding rates have been neutral

Finally, one should analyze the funding rate, which is the fee charged by derivatives exchanges to balance the exposure between longs (buyers) and shorts (sellers) due to their different leverage ratios. Sure enough, this indicator rises when a buying frenzy occurs.

The current funding rate is 0.04% per 8 hours, or 0.8% per week, which is not unusual. For example, back in December 2020, it stayed above 1.5% on a weekly basis for a full month before reappearing in February 2021.

Similar to the Fear and Greed indicator, this indicator shows that buyers are becoming overconfident as it crosses 0.10% every 8 hours, but this is not necessarily a worrying level.

Paying a weekly funding rate of 1.5% or even 3% won't force buyers to unwind their long positions as long as they are confident the upside will continue. For example, if there is a short supply of Bitcoin on exchanges, causing a recent rally to $56,000 as holders accumulate, there may be room to go to $80,000 or higher.

However, if there are some bearish events in the near future, such as the rejection of an application for an exchange-traded fund, or a severe ban on stablecoins in the United States, a market crash can also be expected. In this case, Bitcoin will not break the all-time high, and those backward-looking indicators will finally "work".