What is a dead cat bounce in crypto?

A dead cat bounce in crypto is a short recovery in price during a steep fall that fades once the decline resumes. The grim name comes from the saying that even a dead cat will bounce if it falls from a great enough height. In crypto the phrase is common, but only hindsight shows whether a bounce was really one.

What is a dead cat bounce?

The term comes from stock markets. World Wide Words traces its earliest recorded use to the Financial Times in December 1985, and a 1986 news story credited a Wall Street analyst with spreading it.

The Motley Fool Australia defines it as a brief, temporary recovery after a significant, prolonged decline, and treats it as a sign that the larger downtrend is still in place. It notes these bounces tend to last from a few days to a few weeks. It also cites bitcoin after its late 2017 peak as an example, when a short rebound in the following months gave way to further falls. The wider cycle is covered in bull market vs bear market.

What does a dead cat bounce look like?

On a price chart, it usually appears as a sharp fall, a quick jump back up, then a slide that carries the price to new lows. The Motley Fool lists features traders look for:

• a long, steep decline beforehand
• a sudden, sharp rebound
• no clear change in the news or fundamentals behind the asset
• lighter trading volume during the rebound than during the fall

The same source says none of these signs is foolproof. The guide on how to read a crypto chart explains candles and volume bars.

What is the difference between a dead cat bounce and a reversal?

A reversal is a lasting change in direction, where a downtrend ends and a sustained rise begins. A dead cat bounce is a pause inside a downtrend that keeps going.

The difficulty is that both start the same way. Writing in March 2020, financial planner Ben Carlson showed that stock bear markets have contained large rallies that later failed. During the Great Depression, stocks rose almost 50% before falling more than 80% further, and the 2000 to 2002 crash included three separate rallies of about 20%. He argued that real bottoms also begin with strong gains, so the true nature of a bounce is only known later.

A heavy selling climax that sometimes comes before a bottom is explained in what is capitulation in crypto.

What is a relief rally in crypto?

A relief rally is a neutral name for any rise that interrupts a sell-off, often as selling pressure eases or short sellers close out positions. It says nothing about what follows. If the rally fails and prices make new lows, people later call it a dead cat bounce. If it turns into a sustained recovery, it gets remembered as the start of a new trend.

So the labels describe past price moves, not forecasts, and patterns from one cycle may not repeat in the next.