What does Bitcoin being in an extreme oversold state mean?

What does Bitcoin's extreme oversold state mean?

Author: Omkar Godbole, CoinDesk; Translation: Song Xue, LianGuai

A technical analysis indicator shows that as bond yields surge, pressure is being exerted on risk assets, including cryptocurrencies, causing Bitcoin to enter an extreme oversold condition.

Bitcoin’s 14-day relative strength index (RSI) has dropped well below 30, indicating an oversold condition. The indicator has fallen to its lowest level since the March 2020 crash.

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The 14-day RSI has dropped to its lowest level since March 2020. (TradingView/CoinDesk)

RSI is a momentum indicator that ranges between 0 and 100, showing recent price changes of an asset relative to its average price change over a specific period (usually 14 days).

A reading below 30 reflects an oversold condition, indicating that the price has fallen too quickly relative to recent average levels. Conversely, a reading above 70 indicates an overbought condition.

One of the mistakes made by the cryptocurrency community on X (formerly known as Twitter) and most novice traders is to view oversold and overbought readings as signs of upcoming bullish and bearish reversals.

But that is not the case. An oversold RSI reading indicates that the price has fallen too quickly – that’s it, while an overbought reading indicates that the price has risen too quickly.

If there is any difference, it is that an RSI reading below 30 or in oversold territory suggests that the bearish momentum is strengthening. As the saying goes, the time the indicator remains oversold may be longer than the time buyers can hold out at lows.

Alex Kuptsikevich, senior market analyst at FxPro, said that Bitcoin’s price trend has turned bearish.

“Bitcoin significantly broke below the 200-week and 200-day moving averages at the close of last week, marking a shift to a bearish trend. From the current level near $26,000, the next downside area seems to be the final pivot zone at $24,700,” Kuptsikevich said in an email.

The 14-day RSI has dropped to its lowest level since March 2020. (TradingView/CoinDesk)

At the time of writing, the price of Bitcoin is $26,000. Last week, the price dropped by over 10%, and the US 10-year inflation breakeven rate reached nearly 2%, hitting its highest level since 2009.

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