If you are trading cryptocurrencies, you may have come across the term “dead cat bounce”. A dead cat bounce occurs when a falling cryptocurrency suddenly regains some of its value before falling further. In other words, a dead cat bounce is an illusory increase in the value of an asset caused by short-term fluctuations in the market.
So, the recent drop in Bitcoin (BTC) to $ 30,000 and the imminent recovery to $ 38,000 has left traders confused as to whether this is a “dead cat bounce” that will lead to a drop in token prices, or a solid reversal, to set the basis for the next step higher for the market.
After such a rapid decline, the reversal should be confirmed by growing trading volumes. Otherwise, the bounce may really be nothing more than a “dead cat bounce”.
In doing so, seasoned investors jumped at the opportunity to accumulate BTC at lower prices. Thus, professionals, despite the panic sales, believe that now is the right time to buy digital gold.
How do you know if it’s a “dead cat bounce”?
Unfortunately, there is no easy way to detect a dead cat bounce on Bitcoin. Here are its main characteristics:
– the price of cryptocurrency is constantly falling;
– cryptocurrency regains its value for a while;
– the cryptocurrency then depreciates again and falls below the previous low.
As you can see with these characteristics, it is quite difficult to determine the rebound of a dead cat. It is quite difficult to distinguish between running, overestimating, and bouncing of a dead cat before they occur.
How happens a “dead cat bounce”?
A “dead cat bounce” is usually a reflection of short-term speculation. Short-term traders, such as day traders, usually buy falling assets in the hope of making a small profit during the day. Everything in order to make a profit by capitalizing on short-term fluctuations.
Sometimes such actions can lead to an increase in the value of the cryptocurrency, which will generate further interest from buyers, causing the price to bounce when everyone sees the price of the cryptocurrency rising. This could temporarily lead to an increase in the value of the cryptocurrency until traders start selling it back.
Another reason for a “dead cat bounce” is when sellers exit their positions. If a cryptocurrency looks overvalued, most traders will sell it shortly, expecting the price to drop. When many traders exit short positions, it leads to a flurry of purchases, which, in turn, causes a short-term rise in the price of cryptocurrencies. Sometimes this attracts more traders to the market, which leads to further price increases. However, this effect is short-lived.
“Dead cat bounce” isn’t always a bad thing. For day traders who love volatility, volatility can be a great opportunity to make good profits.
No reason to worry
Renowned Bitcoin analyst PlanB assures that the recent downturn is within the standard range. Accordingly, he believes there is no reason to worry.
Moreover, one of the bullish signs needed to support the recovery is the “skyrocketing” turnover of fiat-backed stablecoins. Over the past week, the figure has increased from 15 billion to almost 21 billion. Although this could be a sign that buyers are “loading ammunition” on the flop?
More experienced traders are betting that the market is moving up, but volatility will still be present.