Bitcoin in purgatory
Preparing for the next pump. Plus random thoughts on the new frontier.
Given this is my first post here I will not assume much knowledge of charts. I use an application called TradingView for my chart work.
First I’ll explain a couple of things about price action starting with candles.
What are candles? Candles are the small green and red vertical marks that rise and fall on the chart. Each represents the price range for that day. You will see a thick part of the candle. That’s called the candle’s body. The ends of the body represent the start price and end price for that time period (1 day in this case). The wicks that appear on some candles are the price action that happened during that day that were outside of the start and end price range. The wicks are largely ignored by people who study the charts.
Studying the chart is known as Technical Analysis or “TA”.
Why does TA work? Well, the price action for any stock or crypto or index is based, in the short term, on investor sentiment. This is often described in it’s two extremes as fear and greed. So human psychology and complex human planning drives the short term price action. This shows up in the charts as the candles.
We can also add more indicators that measure investor sentiment, market strength, market volatility, trailing price averages and other information that helps add clarity to our decision making as investors.
The Bitcoin chart
So here’s my chart of Bitcoin as at Saturday 11th December 2021. The chart shows Bitcoin’s price action over the last year. Each candle represents 1 day.
The immediate price (in USD) is moving in a range between $47k and $52k. Bitcoin can actually go as high as $60k and as low as $40k without changing the market structure. In that sense the price can go up and down within that range without making any significant difference.
Why could that be true? Well market structure is set by creating higher or lower highs and higher or lower lows. If Bitcoin breaks down to below the orange “risk line” on the chart then this will ensure a new lower low is going to be set. In that situation all bets are off how far Bitcoin could fall. We are then going to rely in the short term on big investors coming in and ignoring the immense fear in the market and buying up all available Bitcoin to create a new floor in the price. Perhaps that might occur around $39k but it might just as well happen at $30k. If it happened I think people who are long term holders of Bitcoin (“HODLers”) should take a few breaths and relax knowing that a year or two from now the price will still be up making all time highs.
An aside: You can scroll down towards the bottom to see my thoughts on what could make Bitcoin fall and never reach new All-Time-Highs (“ATHs”) again.
Retail investors? We are the little fish in the investment pool. Perhaps we are the krill. And as krill we can easily become food for whales. This happens when retail investors get too fearful and capitulate by selling (frequently at a loss) when the market falls.
New investors capitulate at the worst time: at the bottom
Below is a chart showing spikes in capitulations. Notice how the investors capitulate at the local bottom of the market and then the price generally recovers soon afterwards.
Also notice that there’s been a major capitulation happening right now:
Unfortunately for retail investors, signs of capitulation are also very good signs that the bottom has arrived and you should be buying rather than selling.
But forgive the retail investor, because the level of fear the market is so high it is natural to stampede towards the exit.
Long term holders act very differently
Let’s compare that behaviour to what long term holders do:
Long term holders have reduced their selling. And if you look back they are generally selling as the price is approach a peak. That selling is often what kills the upward momentum of a rally. Right now, they are most likely to start selling again above $68k with heavier sell-offs occurring at various points as we make new ATHs.
Whales also use coordinated short dumping of Bitcoin into the open market at moments of low demand to push the price down. They can do this by purchasing “short” positions in the futures market then selling their actual Bitcoin at a moment of market weakness (bad news, low demand such as on the weekend, and where the price is sitting near to a market structure so that if it breaks, it is likely to have a more severe drop).
The whales insulate themselves from the drop they’re about to create and create new funds through the sale of their Bitcoin to then buy it up in greater quantities at the lower prices they’ve created. As the price crashes, it starts to affect investors who are holding leveraged “long” trades. Their positions start to be automatically liquidated where their trade is sold to the highest bidder, leading to further price falls as supply suddenly outstrips demand.
You can see that sudden crash in my chart image. I’ve circled the recent crash that occurred last weekend which took us from $51k down to $42k. Some exchanges that focus on futures trading went even lower wiping out even more traders.
When’s the good news coming?
Now is the good news. The market looks very nearly ready to pump. Sure it may take until some time in January, but there’s a number of things that make it likely to come with any very good news.
I’ve been predicting that the price action will repeat the two previous bunny hops. Each bunny hop is marked on the chart by a blue curve that approximates the pathway.
As you can see, I expected that the new bunny hop would start this week but last weekend’s crash induced by some whales changed the market structure. So, this week has been about establishing a new price floor. I’m not at all certain we’ve reached the bottom. I expect that whales may give it another go at crashing the market this weekend or in the next 2 weeks. But I think their ability to dump the price is looking limited. I may be wrong which will set back the bunny hop even a bit further.
Once the experienced traders think the major low has been found, I see only two likely options: the price ranges sideways but grinds upwards setting new local higher highs and higher lows until it eventually reaches an All-Time-High (ATH). Or we just shoot up. It will almost certainly fall between those two extremes so long as we don’t go back down and break the major low that gets set.
One challenge to the price going up like a rocket ship is that some institutional traders will temporarily exit the market during December to book profits and re-enter in January. Given that we didn't get the highly anticipated December pump, we *may* be waiting until institutional investors are back in January before Bitcoin makes a decisive move upwards into ATHs.
So long as we remain between $46k and $58k, takeoff will most likely happen soon after if there’s some significant good news for the market.
In the week ahead there's an important FED meeting which has both the stock market and crypto markets on edge. The FED are expected to clarify how fast they're going to taper money expansion. If it's more aggressive than the market has priced in, we'll see shares and crypto have a new pull-back or at least slow down any upwards momentum. But the market is anticipating a significant taper rate. If the view is that tapering is gradual enough then the bull market is going to continue.
What’s the evidence that this causes Bitcoin’s price to shoot up? Back at the start of October, crypto had a major pump which started the most recent bunny hop that sent Bitcoin up to it's peak of $69k in early November. The bunny hop began at that moment due to a confluence of several factors including good news on the US regulation front (law makers weren't going to try to destroy crypto), the FED had some positive things to say, the bears were exhausted, and retail investor sentiment was extremely fearful through much of September and people were capitulating as can be seen in the capitulation graph (2nd chart). Finally, irrationally, it was the 1st of October: a new month, with new hope that the horrible, exhausting month of September was behind us. Market go up! All of a sudden, much to the shock of most of the market, leading to massive FOMO which meant retail investors raced to buy into the pump.
Right now I will skip the analogy of a bunny hopping. Bitcoin is now a rocket and the fuse is in place: we've just had congress talking very productively with crypto leaders and retail investor sentiment is extremely fearful. We only need the bears to try to absolutely dump the price and fail to break market structure and then hear that the FED isn't going to turn the money taps off faster than expected and the fuse will probably be lit and the rocket take off. I'm not at all certain that this will happen this week.
But it’s just these sorts of moments that the Bitcoin rocket ship loves to take off. So I'm giving the rocket <40% chance of take off this week.
If that takeoff occurs I expect institutions end of year profit taking to cause minimal impact on the market: they’ll buy into the upward move and the algorithms will take over with continued buying as the price goes up and they “ladder in”. That will mean they will hold onto their long positions until closer to new year to exit and will then get back in earlier in Jan so as not to miss out, thus causing less of a ripple.
Given all these forces and the different choices that will be made depending on what happens in the short term, it's very hard to know how price action will play out at this current point. But my overall view is we're still in an uptrend and we will be seeing all time high prices by the end of Q1 2022.
Why is Bitcoin and crypto in general important?
I think it is as significant as the web was for re-organising how we live and how we all empower each other.
Here’s a popular clip that depicts of how the Internet could be joked about and dismissed as unimportant in 1995:
In my opinion, crypto is similar. It will do to the banking and finance sector what Google did to classified ads that provided the profitability to newspapers. It will reshape whole industries.
It is a new human frontier. That comes with all the promises and problems of humans racing out into that frontier. Scams, traps, and problems await the early settlers, but so does opportunities. It may seem like the gains have already been made but we’re still somewhat early. It’s like the Wild West just after the train lines have been completed. The frontier is now ready for the masses.
What's happening has the potential to help billions of unbanked people secure some finances. No matter what regime you are under you can now keep some money secure and out of the hands of others just by using your “brain wallet”.
It opens up the possibility for some extraordinary things such as an ultra wealthy person directly giving to every individual around the world with no government or institutional middleman involvement. So the return on such direct charity can be 100%. The opportunities in this new frontier are limited only by imagination, courage and the ability to get your message out.
What could make Bitcoin fall and never reach new All-Time-Highs (“ATHs”) again?
People want to know what would make me truly negative in the long term on crypto and specifically Bitcoin. So I will run through what I see are the two major disaster scenarios. I don’t actually think they’re the risks to focus on but if they were to occur they could permanently destroy the value of Bitcoin.
Disaster scenario #1: The market believe that a bad actor had taken control of the mining of Bitcoin with more compute power than the rest of the world could harness then they could break the network by creating bad blocks. This could only happen if they didn’t care about making any money out of the Bitcoins they were mining. The amount of electricity and compute power needed for such an attack could bankrupt China at this point. It could be the equivalent of the Vietnam war for the US or Afghanistan for the USSR. That sounds like hyperbole. If you look at the calculations of compute power, etc. and you consider the response the rest of the world would make to thwart that effort it quickly looks like a disastrous proposition for the attacker. When China turned off all the Bitcoin mining earlier this year at a moment of great market vulnerability (retail sentiment was extremely greedy, market strength was very weak, and the whales had already sold out much of their holdings onto the “weak hands” of retail investors, the crash that came in July was merely brutal but never threatened Bitcoin itself despite a major chunk of the miner activity that protects the market disappearing in a matter of days. Since then mining has fully recovered and the source of power used by the Bitcoin network is mostly renewable making it potentially the cleanest major usage of electricity across the world. For more information see the latest Bitcoin Mining Council report.
Disaster scenario #2: Quantum computing has always held the threat of being able to slice through our current cryptographic standards. There are scenarios where Bitcoin doesn’t upgrade it’s cryptographic security and quantum computing arrives (perhaps unnoticed) and is used to attack the network, breaking into wallets or seeking to demonstrate an exploit of the double-spend problem. I think these things are possible but unlikely and if and when such things occur there will be a major hoo-ha, then the developers will come up with a solution and then the attackers will try again and once the Bitcoin developers have locked down the network again I expect it will go on as it has.
Does that mean I think there won’t be black swan events that do major short to medium term damage to the market structure. Sure, that’s kind of inevitable. But Bitcoin is designed like the internet to survive disasters. It will probably fair better in a truly epic disaster than many other forms of investment which might become rapidly worthless and stay that way for a long time. Given that is both it’s technical underpinnings and the belief of so many holders, it’s likely to fare ok even if the world as we know it is somewhat compromised. If the world as we know it is extremely compromised, even blocks of gold aren’t going to save us. As a believer in the anti-fragile nature of human society, I think this kind of “prepper” thinking is close to pointless but people ask so I want to state my views on those circumstances.
What’s more relevant is that we could find that if we bought some Bitcoin then jumped into a cryogenic chamber and woke up 200 years later, Bitcoin might not still have value. I see it as a 50:50 proposition. New societal dogma and new better options may appear that ensure the values of Bitcoin remain but are superseded by a newer investment so that Bitcoin gradually diminishes and the network is no longer maintained with a liquid market. In that case we can’t fall asleep for centuries…