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What a Bitcoin Death Cross Is (and Why You Shouldn't Care)

By Dan Caplinger – Updated Apr 3, 2018 at 1:35PM

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Find out why everyone's talking about the cryptocurrency.

Volatility has come back into the financial markets, and nowhere have the ups and downs been more evident than in the cryptocurrency arena. Bitcoin has gone from roughly $1,000 this time last year to more than $20,000 early in 2018, only to fall below $7,000 recently.

Most recently, crypto traders have started talking about a phenomenon that they see as worrisome. Known as the "bitcoin death cross," this signal has led some to believe that more tough times are ahead for the first-moving cryptocurrency. Yet while some market participants will inevitably pay close attention to the bitcoin death cross, most of those who see themselves as longer-term investors in the prospects for bitcoin and its peers shouldn't let it change their views on the cryptocurrency, whether positive or negative.

Raised-relief gold bitcoin symbol surrounded by dull grey mosaics.

Image source: Getty Images.

What is a death cross?

There's nothing about a death cross that's unique to bitcoin. Many traders use technical analysis to make decisions about whether to buy or sell an investment asset, applying the discipline equally well to stocks, exchange-traded funds, futures markets, and other asset classes. Looking at charts of price movements can give them insights that they then use to seek to predict future rises or falls in the price of whatever assets they're looking at.

A death cross specifically refers to the relationship between moving averages of various lengths. Technical analysts often look back a certain period of time to generate moving averages, which can reflect trends more smoothly than simply looking at the daily jumps and slumps in the markets. When a shorter-term moving average falls below the level of a longer-term moving average, that "crossing" of the lines is called a death cross.

What happened with bitcoin

In this case, the bitcoin death cross refers to the fact that the moving average of past daily bitcoin prices looking back 50 days recently moved below the level of the corresponding 200-day moving average. Given the recent price movements of the cryptocurrency, the death cross was pretty much inevitable, because the two moving averages were between $9,000 and $9,500 and bitcoin had traded well below that level.

The official cross happened on March 31. The event happened during a long weekend in which prices stayed around the $7,000 mark for much of the period, pulling the 50-day average down more quickly than its 200-day counterpart.

Why bitcoin didn't flinch

Some feared that the death cross would lead to another round lower for the cryptocurrency. In the past, traders using technical analysis have used such signals to predict the beginnings of bear markets, especially after a long upward climb for an asset class.

Yet because of the way the math works for moving averages, it wasn't hard to foresee that the death cross would occur. Whenever an event is predictable, smart traders will try to get in ahead of an inevitable signal, hoping to take advantage of those who wait until later to make investment decisions. In fact, many bitcoin traders were already well prepared for the event, and one could argue that the price drop from more than $11,500 early in March to the $7,000 level stemmed largely from anticipation among market participants that a death cross was inevitable.

As a result, bitcoin prices didn't fall any further when the death cross became official. Indeed, at least in the short term, prices have risen slightly, with some market watchers believing that the bounce comes from a market in which traders have sold off the cryptocurrency too aggressively.

What should guide your bitcoin investment decisions

Traders have the ability to move bitcoin prices dramatically in short periods of time, and technical factors like the death cross are important to many of those who trade bitcoin frequently. But if you want to be successful in the long run, you need to base longer-term decisions regarding bitcoin on your fundamental views for the cryptocurrency over time.

If you agree with the financial institutions that have bet heavily on bitcoin that crypto assets will play a major role in serving billions of people who have limited access to the current slate of financial and banking services available, then a death cross shouldn't stop you from being bullish on the long-term path for the cryptocurrency. If you think that bitcoin is doomed to failure, then your outlook and fundamental understanding of the market should be your justification for your bearishness, not the death cross.

Dan Caplinger has no position in any of the cryptocurrencies mentioned. The Motley Fool has no position in any of the cryptocurrencies mentioned. The Motley Fool has a disclosure policy.

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