A technical indicator that preceded the sudden bitcoin crash in February 2020 is again showing warning signs.
Bitcoin advocates and investors are (understandably) anticipating a "super cycle", with predictions in certain circles that the world's largest cryptocurrency by market cap will reach $1 million.
However, this party could be spoiled - if one technical indicator is taken into account. So warns Ki-Young Ju, founder of crypto analysis tool CryptoQuant, in a tweet today:
$BTC Exchange Whale Ratio(72h MA) reached 90%. It's highest since Feb 2020 before the mass-dumping. Don't take too much leverage on your longs. Be careful.
Which tool is used for whale dumping?
According to CryptoQuant, so-called "whale dumping" is a measure of the deposits of some of the largest Bitcoin holders - known colloquially in financial circles as "whales".
These holders usually keep their transactions secret, and their identities are often unknown. But: tracking whale wallets helps provide information about what large holders of Bitcoin and other cryptocurrencies are doing and how their trades might affect the market.
CryptoQuant uses two indicators to check how whales are dumping their coins: 1. an "All Exchanges Inflow Mean (24h MA)" tool that calculates the average amount of bitcoin deposits across all crypto exchanges, and 2. an "Exchange Whale Ratio tool" that calculates the top 10 inflow transactions relative to total inflows.
The latter indicator is said to show a ratio above 85% when prices shoot up in a "fakeout" or precede a dump. The CryptoQuant blog states:
"IN A BULL MARKET, IT OFTEN STAYS BELOW 85%. IN CONTRAST, IN A BEAR MARKET OR A FAKE BULL MARKET FOR A MASS CRASH, IT USUALLY STAYS ABOVE 85%."
Where is Bitcoin now in this chart?
As the image below shows, Bitcoin's "Exchange Whale Ratio" is currently (time of this writing) at 0.90 - indicating conditions ripe for a "mass dump", according to CryptoQuant.
The last time the metric reached such levels, Bitcoin experienced several sudden price drops. In March 2020, when BTC fell below $4,000 for several hours, the tool peaked at 0.90. It also remained above 0.85 in November 2018, when Bitcoin fell from above $6,000 to below $3,900.
Bitcoin is currently trading a good bit above $46,000 at $46,245 and has risen almost 20% in the last 7 days alone. But given the previous resistance at $46,000 - could the whale dumping tool prove to be right? Only time will tell.