Is the current crypto rally an echo bubble?

For example, when Bitcoin soared earlier this month, market participants were quick to label the rally a "bull trap." Fortunately, the crypto market was able to maintain its growth, making bull trap speculation obsolete.

That brings us back to square one, with analysts still clamoring to explain this sudden turnaround. Some market experts believe that the current trend reversal could point to a potential "echo bubble" and there is some evidence to support this notion. But what is an echo bubble and how will it affect future prices? Tag to find out.

What is an echo bubble?

An echo bubble is a premature market recovery after a much larger bubble has just burst. This type of price action closely resembles the dead cat bounce chart pattern. While the name may sound rather macabre, the reasoning behind this graphic pattern is that even a dead cat can bounce a bit after falling from a considerable height. Therefore, if we look at this bounce on a chart, it can look like a resurgence of a massive drop. However, it's just another bubble that, like all bubbles, will also burst and deal a fair amount of damage.

Unlike a dead cat bounce, however, echo bubbles usually take much longer to spawn. For example, Bitcoin rallied from the $1,000 mark in early 2017 to $20,000 a few months later, before falling to the $3,500 range in 2018. Following this bubble, Bitcoin began to see a renaissance in 2019, rising to around $12,000 before falling to $5,100 in early 2019. 2020.

The 2019 rally was later called a "textbook echo bubble" by Mark Dow, a former IMF economist. This echo bubble started in April 2019 and only vanished in early 2020. This is unlike a dead cat bounce that usually only lasts a few days. Also, in an echo bubble, the extent of the uptrend and downtrend is much less compared to the previous bubble.

For example, in 2017 Bitcoin rose almost 1,900 percent (from $1,000 to $20,000). Whereas, in 2019, Bitcoin rallied 400 percent. In the 2017 bubble, Bitcoin fell from the $20,000 range to the $3,500 mark at the end of 2018. While, in the 2019 echo bubble, BTC fell from around $12,000 to a low of around $5,100 in early 2020.

Is the current crypto rally an echo bubble?

For starters, the timeline fits perfectly. Historically, echo bubbles typically occur a year or two after a large bubble bursts, as seen in the 2019 rally, which was an echo of the bull run experienced two years earlier. As such, 2021 saw the biggest Bitcoin bubble to date, with BTC hitting an all-time high of $69,000 before plummeting to $15,000 a year later. So the sudden renaissance in 2023 fits perfectly into the timeline of previous echo bubbles.

Additionally, Lucas Outumuro, head of research at IntoTheBlock, a crypto-intelligence firm, highlighted 3 reasons why the current rally could be an echo bubble. First of all, he claims that the market capitalization of stablecoins is increasing. He also claims that in November and December 2022, following the FTX collapse, the price of futures contracts plummeted well below the spot markets. However, that has changed in recent months, and as of now, the price of futures contracts has once again risen above the spot markets.

Finally, Outumuro claims that top-tier NFTs are performing better than Ether. While the second largest cryptocurrency by market cap posted gains of 31 percent since the start of the year, eight of the top ten NFT collections still managed to outperform ETH. This renaissance is quite surprising given the plummeting NFT sales volumes towards the end of 2022.

According to Outumuro, these three signs point to a greater appetite for risk in the crypto market. This could push prices further, putting the crypto market “on track for another 2019-like echo bubble.”

If this rally is indeed an echo bubble, the obvious question is where will the bullish momentum end? GoldenTree's Head of Digital Asset Trading Avi Felman believes that the pinnacle of this so-called echo bubble could be around the $27,000 mark.

“In 2019, the echo bubble was Bitcoin breaking out of the lows ~341%. So if the relationship holds, Bitcoin could run ~74.6% below the lows which would be ~27k. ETHBTC in that scenario could be .085 which would mean ~2300,” Felman's tweet on Jan. 13 read.

Erik Voorhees, an early proponent of Bitcoin, has a more optimistic outlook. In a recent Bankless podcast, Voorhees predicted that BTC could reach $40,000 by 2023. That's a 155 percent increase from Bitcoin's November 2022 low.

Conclution

An echo bubble is not necessarily a bad thing. For investors, an eco bubble can present an opportunity for quick profits. It also fills the market with optimism after a big drop.

However, it is very difficult, if not impossible, to detect an echo bubble. In most cases, these market conditions are identified after they have already occurred. Also, when it comes to cryptocurrency, we all know how volatile the market can be. Therefore, it is important to do your own research and invest only what you can afford to lose.