If you are into cryptocurrency trading, you may have come across the term dead cat bounce. The phrase comes from the saying that even a “dead cat will bounce when thrown from a high enough height”.
A dead cat bounce happens when a declining cryptocurrency suddenly regains some of its value before it falls even further. In other words, a dead cat bounce is an illusionary increase in the value of an asset caused by short term fluctuations in the market.
Here are two examples where a dead cat bounce is referenced in mainstream media
- Bitcoin’s price will fall to $2,500, the rally is a “dead cat bounce”
- Bitcoin price dips below $10k as analyst eyes ‘dead cat bounce’
Cointelegraph September 04, 2020
A Dead Cat Bounce Is Not a Recovery
A Bitcoin dead cat bounce is different from a recovery of that for a dead cat bounce, where the price of a currency rallies for a short time and then resumes its downward spiral.
A dead cat bounce also differs from mid-day volatility because it applies to daily trading activity. A Bitcoin day trader should not refer to a Bitcoin dead cat bounce when the asset price rallies up and down in the course of one day.
How to Spot a Dead Cat Bounce
Unfortunately, there is no easy way to spot a Bitcoin dead cat bounce. Here are the main characteristics:
- the cryptocurrency’s price falls consistently
- the crypto coin regains value for a limited amount of time
- the crypto coin depreciates again falling below its previous low
As you can see from these characteristics, it’s hard to spot a dead cat bounce . You cannot tell between a rally, revaluation, and a dead cat bounce until after it has happened.
How Does a Dead Cat Bounce Happen?
A dead cat bounce is usually a reflection of short-term speculation. Short term traders such as day traders usually buy declining assets, in the hope that they might make a small profit in the course of a day. This is because they make profits capitalizing on short-term fluctuations.
Sometimes, this interest can cause the value of a cryptocurrency to increase, generating further interest from buyers who jump in when they see the crypto’s price rising. This can temporarily cause the cryptocurrency to increase in value until the traders sell the cryptocurrency back again.
Another cause for a dead cat bounce is when sellers exit their positions.
If a cryptocurrency looks overvalued, most traders will short-sell it expecting the price to fall. When many traders exit a short-sale position it leads to a flurry of buying which in turn causes a short-term rise in the cryptocurrencies price. Sometimes, this will attract more traders to the market which will cause a further rise in price. However, the gains are short-lived.
A dead cat bounce is not always a bad thing. For day traders who love volatility, this might be an opportunity to make significant gains.