A recent volatile run-up in the Ethereum and Bitcoin markets has exceeded their value into “overbought” regions, as per Relative Strength Indicator (RSI).
In retrospect, the RSI is a momentum indicator that measures the magnitude of recent price changes in an asset to determine its overbought or oversold conditions. Displayed as an oscillator, it can have a reading anywhere between 0 and 100, with 30-70 serving as a neutral area. Traders perceive RSI above 70 as overbought—and below 30 as oversold.
They further treat an overbought RSI as their cue for a potential trend reversal or a price pullback.
Bitcoin’s RSI following its jump from $3,858 in March to above $41,000 in January has surged to 89.48 on its daily chart. Meanwhile, the same reading for Ethereum is at 89.36 after its $1,335 percent move within the same period.
Ethereum trades near its yearly high as its RSI signals topping out. Source: ETHUSD on TradingView.com
Typically, the overextended rallies in both the assets have prompted some analysts to see deeper price corrections ahead, with some even forecasting a 50 percent drop from their respective session tops. Nevertheless, one analyst believes that traders should not sell their Bitcoin and Ethereum based on RSI warnings.
Koroush AK, who successfully predicted Bitcoin’s record high in 2020, says RSI is not a good indicator when it comes to measuring “parabolic uptrends.” Instead, it works fairly well in determining movements in ranging markets.
RSI is an oscillator.
-Great for ranging markets
-Less so for parabolic uptrends
Don’t sell your $BTC and $ETH based on RSI.
— Koroush AK (@KoroushAK) January 8, 2021
The statements came as Ethereum’s and Bitcoin’s RSIs continue to form higher highs despite staying in an overbought zone on weekly charts. That reflected a greater euphoria among traders in the cryptocurrency market, especially in the wake of booming institutional awakening about Bitcoin’s anti-inflation features.
Institutions Offseting RSI Fears
Observers believe that institutions are buying the local price dips. CryptoQuant CEO Ki-Young Ju further highlighted the trend by proving a larger BTC outflow from Coinbase Pro into newly-created wallets.
The analyst noted that the recipient addresses were custodial in nature, pointing to a rise in over-the-counter deals even as Bitcoin surged above $30,000.
“Looking at the latest Coinbase outflow, possibly OTC deals, I think we can estimate their PNL,” he tweeted on Friday. BTC surged 24% since Jan 2. If you were institutional investors, would you be satisfied with 24% PNL for Bitcoin? Bullish.”
Coinbase Pro OTC deals have returned 24 percent gains to institutional investors. Source: CryptoQuant
That partially explains why retail traders ignored RSI warnings in the previous daily sessions. But the question remains how far the ongoing rally in both Ethereum and Bitcoin markets could last? One analyst believes they will correct based on the same RSI alerts.
“RSI has called this move better than any other traditional tool and it called for a Mega move,” the pseudonymous entity said in response to Mr. AK.