What is a relief rally in crypto?

A relief rally in crypto is a rebound in prices that interrupts a decline because the pressure behind the fall lets up for a while. Shmoop defines it as a short-term bounce that comes when the worries behind a drop ease and investors buy back in. In crypto, the term is often used for bitcoin and the wider market after a sharp sell-off.

What causes a relief rally in crypto?

InCred Money lists three common drivers:

• Short covering. Traders who bet on a fall buy back to lock in gains, which adds buying pressure. A stronger version is explained in what is a short squeeze in crypto.
• Bargain hunting. Some buyers step in because assets look cheap after a fall.
• Less bad news. Prices can jump when news turns out better than feared, even if it is not good on its own terms.

Crypto has its own twists. COIN360 notes that crypto trades around the clock and has a larger share of retail traders than stock markets, which may make relief rallies more frequent. Analysts also watch signs that sellers are running out. In July 2024, Cointelegraph reported that CryptoQuant read falling stablecoin outflows from exchanges as a sign that large-scale selling was easing, while Santiment pointed to heavy losses among small traders. A selling climax of that kind is covered in what is capitulation in crypto.

How common is a bear market rally?

Very common, at least in stocks, which have far longer records than crypto. Kiplinger, citing InvesTech Research, reported in 2016 that every one of 21 US stock bear markets since 1901 had at least one rally of 5% or more, and 14 had rallies of 10% or more. The bear market that began in 2007 had 12 rallies of at least 5%. E*TRADE found that since 1962, bear market rallies of 4% or more ranged from just under 5% to over 24%, lasting from days to more than three months. It added that a market low cannot be identified in real time. For how these phases are defined, see bull market vs bear market.

What is the difference between a relief rally and a dead cat bounce?

A relief rally names the cause of a bounce, easing pressure. A dead cat bounce is a label applied afterward to a bounce that failed and gave way to new lows. Every dead cat bounce starts as a relief rally, but not every relief rally ends as one. Our guide on what is a dead cat bounce in crypto covers that side.

Some sources draw clues from how a rally looks. InCred Money says relief rallies tend to come on low or moderate volume and from short covering or less-bad news, while lasting reversals tend to show heavy, sustained buying and a real change in conditions such as interest rate cuts. None of these signs is reliable on its own, and past patterns in one market or cycle may not repeat in another.