Bitcoin Plunges to Most Oversold Levels Since 2023: A Signal or a Trap?

Bitcoin just flashed its most extreme oversold signal in nearly two years. The flagship cryptocurrency's current drawdown has traders scrambling—is this the bottom, or just another pit stop on the way down?

The Technical Breakdown

Forget the noise. The metric that matters right now is the Relative Strength Index (RSI), and it's screaming. Hitting levels not seen since 2023, this isn't your average dip—it's a full-blown technical capitulation. Historically, zones this oversold have either been fantastic buying opportunities or brutal traps for the overeager.

Market Psychology at a Crossroads

Fear is the dominant currency. Leverage gets flushed, weak hands fold, and social media sentiment turns from 'buy the dip' to 'abandon ship.' This is where conviction gets tested. The smart money watches for volume—is the selling drying up, or is there more pain to come?

A History Lesson in Volatility

Bitcoin doesn't do gentle. Its entire history is written in these violent drawdowns and explosive recoveries. Each major oversold event has been a chapter, rewriting the rulebook on what's possible. This one's just adding a new page.

The Cynical Take

Of course, the usual finance pundits—the ones who called Bitcoin a scam at $100 and a bubble at $1,000—are now solemnly nodding about 'risk-off environments' and 'macro headwinds.' Funny how traditional metrics only seem to apply on the way down.

What's Next?

No one rings a bell at the bottom. But extremes like this don't last. They resolve, often violently in the opposite direction. Whether that resolution starts next week or next month is the trillion-dollar question. One thing's certain: complacency is off the table.

As of December 18, BTC traded at $86,948.17, with a dominance of 57.6%. The leading coin is just $10,000 above the yearly lows at around $76,000, raising comments that the market’s bullish momentum was wiped out in the latest crash.

The October 10 crash and liquidations have a lasting effect for over two months. Historically, BTC and crypto have taken at least three months to recover liquidity and speculative open interest. The recent slides below $90,000 further solidify the beliefs that BTC may take longer to recover for a new bull market. 

In the past months, BTC saw a mix of selling and re-accumulation to different wallets. Derivative trading sentiment remains fearful, with low enthusiasm for an imminent rally. BTC is pressured by ETF selling, while some traders are trying to protect their earnings from an eventual prolonged bear cycle. 

Can BTC reverse course? 

BTC has shown indications of becoming an oversold asset for the past two months. However, this was not enough to re-spark the price rally. 

The market is still vulnerable to liquidations, attacking long positions whenever there is more liquidity accumulated. 

There are also indicators of traders protecting from ongoing dips in the $80,000 range. BTC open interest is down to $27.4B, remaining at a six-month low. The drawdown continued since the yearly peak at over $44B as of October 6. 

Spot trading has also been insufficient to stop the slide. Episodes of rapid selling have also shown their ability to stop any attempts at breakout rallies. As Cryptopolitan reported, BTC recovered to $90,000, only to crash to $85,000 in minutes. Additional Glassnode data shows holders are still distributing their BTC holdings.

Based on options market positioning, traders may become more bullish above $90,000. At prices below that, traders opened more put options to protect from further downside.

BTC shows signs of local bottom

Based on the current metrics, BTC is showing signs of reaching a local low for its price. However, the markets are anticipating more dips, with downside protection for a slide under $80,000. 

BTC is setting expectations for ending December in the red, while logging a net yearly loss. 

Only around 64% of the BTC supply is in profit, once again sinking to levels not seen since 2023. For now, whales have realized enough gains, but BTC may see further selling at other capitulation levels. 

The net unrealized profit and loss still shows there are multiple wallets in profit even at thee $86,000 price range. The metric may indicate that there are still confident holders. On the other hand, an ongoing price weakness may mean the BTC capitulation is not over.

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