Bitcoin investors love the golden cross and death cross — here’s why they matter but there are other factors to keep in mind

They say you cannot apply traditional wisdom when it comes to the crypto market, but that doesn’t necessarily mean you can’t track it using some traditional means.

Many in the Bitcoin trading game use the strategy of following the ‘golden cross’ or the ‘death cross’ when it comes to long term investment in Bitcoin — one of the oldest strategies from the stock market world.

And, while it's certainly one of the indicators to follow if one’s an investor looking to HODL, there are other market conditions that one should factor in as well — like price history, risk involved, economic reports, an asset’s volatility and predictions about its price movement.

What is the golden cross?

The term ‘golden cross’ is used in traditional stock trading, and its meaning doesn’t change for Bitcoin either. A golden cross occurs when the short-term moving average of an asset crosses the long term moving average.

So, if you’re tracking the price of Bitcoin on an exchange like WazirX on a daily basis, you can compare these averages by making a graph. Usually the short term is considered to be a period of around 50 days, while the long term is considered to be around 200 days.

Hence, if you chart a price of Bitcoin’s average price over these periods and find that the 200-day curve is crossing the 50-day curve, that’s a golden cross.

A golden cross is a strong indicator that the market is set to make an upturn soon, which means it’s a good time to put your money in a particular asset. A golden cross usually starts with a downturn in both the averages, followed by the short term average crossing the long term average, and then the short term average continues trending upwards as the market remains strong.

What is the death cross?

The death cross, on the other hand, is the exact opposite of the golden cross and tells you that the market is about to make a downturn, which means you may want to take your money out beforehand.

This is also marked by a crossing of the short term and long term average, however, in a death cross the short term average cuts the long term average while moving downward. It then continues moving downwards for a prolonged period, as the market settles into the bear phase.

Why are the ‘golden cross’ and ‘death cross’ important for Bitcoin?

Now here’s the thing, while these metrics do apply to Bitcoin and other crypto assets to some extent, it’s important to remember that cryptocurrencies ARE NOT traditional assets. The primary difference being in the fact that they are far more volatile than almost any other popular asset class today.

As a result, a golden cross doesn’t necessarily mean that the market will trend upwards and remain upwards for the long term. In traditional trading, investors would take long term positions based on a golden cross, which may not work for something like Bitcoin or Ethereum, which sometimes change prices in a matter of hours.

Some experts recommend changing the definition of short and long term. For instance, if the 50-day average is crossing the 200-day average upwards, then compare a 10-day average against the 50 and 200 day averages. Sometimes, you will find that the 10-day average is signalling towards a death cross. Which means you should be more careful about taking a long position and avoid a ‘fakeout’.

What is a fakeout?

A fakeout is basically a situation where an investor takes a position expecting an upturn, but the asset moves downwards instead. This could happen for a variety of reasons, including unexpected regulatory moves, people suddenly cashing out and more.

Example of golden cross

In August, tracking platforms and price charts suddenly suggested that a golden cross was on the horizon. Blockchain tracking platform Glassnode reported a possible golden cross occurring between the 30-day and 60-day averages of Bitcoin around August 19-20. The same was pointed out by traders around September 12, but this time based on longer averages.

Examples of death cross

On June 22 this year, about three months after the crypto market slid into a bear phase, Al-Jazeera reported a death cross for Bitcoin, seemingly triggered by a stream of negative news about regulations being rolled out in China, which was the biggest market in the world for Bitcoin mining at the time.

Other metrics to track

Tracking the crosses is one of the ways to make money while trading on any asset, but there are other metrics to track as well.

Return on Investment (ROI): The ROI can help you gauge the risk of putting money into a particular cryptocurrency. Trading platforms will often provide a profit vs cost analysis of an asset, which tells you what kind of risk you’re taking.

A metric called Sharpe Ratio, which was developed by Nobel laureate William F. Sharpe, lets you measure risk. It’s the ratio of the average return of an asset, earned in excess of the risk free rate against the volatility of the asset. Risk free rate is the rate an investor would expect from an absolutely risk free asset.

Market Capitalization: Perhaps the easiest metric to watch is the market capitalization of a crypto asset, which you can do using platforms like Coinmarketcap. The best assets have the highest market caps, which means that they have a lot of people betting their money and building platforms on top of them.

Open High Low Close (OHCL) prices: Trading platforms will also show you OHCL prices, which are basically graphs that track the open, high, low and closing prices of the cryptocurrency over a chosen period of time. It gives you a good idea of how the asset has been performing over that period, and can also be compared against all time highs (ATH) and all time lows (ATL) to get an idea of how the asset is performing.

Circulating supply: Bitcoin is an asset run by computers, but it still has a limited supply. That’s true for most other cryptos as well, and the available supply of an asset determines the liquidity in the market. The more coins in supply, the greater the liquidity available on the market.

This also requires investors to know how many coins are resting in large Bitcoin wallets owned by users who are called ‘whales’. Some reports have indicated that 85% of the current Bitcoin supply is lying in wallets and doesn't enter the liquidity pool.

Disclaimer: This is a sponsored post in partnership with WazirX. Do your own research (DYOR) before deciding to invest in any asset, cryptocurrency or otherwise.