The bitcoin-US dollar exchange rate (BTC/USD) is in freefall after Chinese bitcoin exchange ViaBTC became the second exchange to shut down domestic trading amid news more announcements are forthcoming.

As per CoinMarketCap, the bitcoin price has lost more than 20% of its value in the last 24 hours.

Week-on-week, the world’s largest cryptocurrency is down 29%. On a monthly basis, BTC has lost 28%. Perhaps even more notably, the price of bitcoin has shed almost $1,000 over the last 48 hours.

For a time, it appeared that the oversold intraday technical conditions could yield a relief rally to $3,700 levels. However, the bulls continued to exit the market on fears other exchanges would close down their Chinese desks.

More announcements are now only likely to amplify fears and trigger further selling.

USD strength to complicate matters

When discussing cryptocurrencies, the other side of the story, i.e. the US dollar, is often ignored.

While the record rally to $5,000 levels was more due to bullish bitcoin stories (SegWit activation, heightened institutional interest), the fact that the greenback was being sold across the board isn’t a mere coincidence.

Dollar Index and BTC/USD Comparison chart

The chart above shows the Dollar Index topped out in early January, around the time that bitcoin began its record rally in mid January.

By no means are we trying to suggest that bitcoin rally was the result of USD weakness, but the chart does suggest that the broad based USD sell-off could have amplified the bitcoin rally.

Forex market experts are calling for an interim bottom in the dollar index as the China reflation story is gathering pace again. The US also reported a higher inflation number on Thursday, which means the Fed could maintain its gradual pace of policy tightening.

Again, a strong US dollar does not mean bitcoin would continue to fall. However, it would certainly amplify the bearish move or make it difficult for the digital currency to revisit its yearly high of $5,000

Is there a scope for recovery in bitcoin?

Technical studies say the sell-off is overdone and bitcoin is poised for a minor relief rally.

Daily chart

As seen on the chart above, both RSI and Stochastics are oversold [under 30.00], which means an extended price move to the downside. When price reaches these extreme levels [under 30.00], a reversal is possible.

4-hour chart

Both RSI and Stochastics are extremely oversold. A minor recovery could confirm a bullish divergence, which occurs when price forms lower lows, while the oscillator (in this case RSI and Stochastics) forms higher lows.

The bullish divergence would be confirmed if the current or the next 4-hour candle hits fresh lows, but ends on a positive note.

A minor technical correction could follow, although fresh offers could hit bitcoin around the falling trend line 1.

Key levels to watch

Weekly chart

$3,027 – 61.8% Fibonacci retracement of the rally from the July low to September high

$3,000 – June high

$2,855 – 50% Fibonacci retracement of 2017 low – high

$2,350 – support of the trend line sloping higher from the March low and the July low

View

The oversold nature of the daily indicators suggests potential for a corrective rally to $3,300-$3,400

The sell-off could be easily extended to $2,350 if Chinese exchanges continue to shut down BTC trading desks.

A rally back to $5,000 would be easier said than done as the US dollar seems to have found a footing. Seasonality study shows, the greenback is usually strong in the third and fourth quarter.

Markets image via Shutterstock