What Is A ‘Dead Cat Bounce'?
Updated: Jan 26, 2022
On May 19, 2021, at around 11:15 AM ET, Bitcoin regained over $5,000 in value, just a few hours following one of its recorded lows. Around the same time, Ethereum climbed up to $534 and Dogecoin followed suit for an extra 15 cents, bringing its value to 37 cents. Other popular cryptocurrencies – like XRP, Litecoin, and Cardano – experienced a rapid rise as well.
This sort of sudden, exponential recovery is not uncommon – especially in the crypto market. It’s called a “Dead Cat Bounce,” and all major cryptocurrencies have gone through them at least one point in time.
Dead Cat Bounce: A Definition
So what’s a dead cat bounce? Investopedia defines it as a “temporary, short-lived recovery of asset prices from a prolonged decline.” It usually happens when cryptos are experiencing a long-term downtrend. When a steady decline in value is interrupted by brief periods of recovery or small rallies, the cryptocurrency in question is going through a dead cat bounce.
The phenomena is so-named due to the notion that even a dead cat will bounce if it falls far enough and fast enough.
A little macabre, but pretty on-point.
Major cryptocurrencies have made seemingly incredible recoveries from major value dips, only for them to drop back down in just a matter of hours.
Take Ethereum. In April 2018, Ethereum started the month with a slow decline. It made a supposedly heroic comeback with prices jumping from $383 to nearly $687. However, by December 31st of the same year, the crypto had dropped to a whopping $139 – a new low.
A more recent example would be Ether’s price surge – and subsequent crash – last May 20, 2021, where it reportedly climbed from $2,443 to almost $3,000 in a matter of hours. It seemed even more incredible considering that the cryptocurrency had literally just gone through a 27.61% price crash the day before.
Hopes were soon dashed, however, when Ether prices rapidly began to drop again after its initial awe-inspiring 13.55% increase in value. This left analysts to believe that the cryptocurrency’s comeback was nothing more than a “dead cat bounce.”
The Problem with a Dead Cat Bounce
If you’re an avid player in the crypto market and you follow different currencies religiously, a dead cat bounce can be a pretty frustrating incident. When you’re in the middle of it, it’s near impossible to tell. A value improvement following a steady decline could be a stable recovery just as much as it could be a short-lived return. To know for sure, one would have no choice but to wait it out.
And when it concerns something as volatile and unpredictable as cryptocurrencies, this level of uncertainty can be discouraging—and oftentimes damaging, too.
Technical analysts consider a dead cat bounce to be a continuation pattern, where another continuous dip follows the initial apparent reversal of the prevailing trend in value. The rise and subsequent fall of the cryptocurrency becomes a dead cat bounce once the price drops below its prior low.
This means that even veteran traders could mistake a rally following a steep incline as a dead cat bounce when, in reality, it’s a solid trend reversal—and vice versa because there’s simply no way to predict if the cryptocurrency’s recovery is long-term or short-lived.
Being able to calculate the outcome of the rally as it’s happening – as impossible as it is – would be a game-changer.
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