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As Bitcoin goes under the hammer, is a major change in the cryptocurrency markets taking place?

As Bitcoin goes under the hammer, is a major change in the cryptocurrency markets taking place?

EMOTIONAL RESCUE

Fake out or a real move? How can you trade safe, when you don’t know what’s real?

One of the big mistakes made by the 95%, the majority, is they look for perfection. They wait and hold off on decision making until they are assured it’s safe to enter.

After 66 days of Bitcoin closing within a $600 range, volatility is back. On November 14th, 2018, Bitcoin opened at $6,255. At 9am New York time, Bitcoin was trading at $6199, but six hours later it had dropped 15%.

If you googled the search term “bitcoin news” the following weekend, you’d be hard pressed to find a positive comment.

CNBC reported that Tom Lee, probably Wall Street’s best-known Bitcoin analyst, (and a perennial Bitcoin bull) has lowered his 2018 Bitcoin year-end target by 40%, from $25,000 to $15,000.

The fair value price of Bitcoin, according to Lee, is related to the breakeven cost of mining, and he uses this metric as the basis for his analysis. Using the Bitmain S9 as the benchmark for mining equipment, Lee’s firm, Fundstrat, estimates the breakeven cost for Bitcoin mining is now $7,000. His fair value price estimate for Bitcoin is 2.15 times the breakeven mining cost.

The high to low range on November 14th was close to $1,000, but Bitcoin has made many similar price moves since the beginning of its fourth bubble in January 2015, so this time, what’s different? The difference is this time the down move was accompanied by 615% of average volume turnover. And that, in case you are wondering, is a lot.

The cryptocurrency markets got beat up this week, with pundits blaming the drop on the Bitcoin Cash hard fork and everything in between. The 5%, the most consistent investors and speculators, don’t listen to the news, preferring instead to build up their picture of what’s going on, analysing direct market feedback for evidence of shifts in supply and demand.

After a large percentage move down, the 5% are looking for a missing component. The trait that shows up at lows and is absent at highs. Fear.

Read on…


Against the Grain

The cryptocurrency markets are highly correlated. This week, only 7% of the top 100 ranked coins had a positive return. One of the sieves the 5% use when a large percentage of the entire market falls is to look for cryptocurrencies that buck the trend.

IMAGE 1.png

Out of the top 100 ranked coins by market capitalisation, the seven coins that closed higher, over the last week, listed by market cap rank are MOAC, Nasdacoin, Factom, SmartCash, Vitae, E-Dinar Coin, and Energi.

In Contact Left, we discussed the upcoming hard fork of Bitcoin Cash. Understanding how blockchains work is a challenge, especially so, if you’re not up to speed with computer speak, but there is a method you can use to help you decide which coins or blockchain technologies have a shot at attaining market dominance.

Start by asking what problem does the coin or blockchain solve, and then, if you think it’s a realistic solution, ask, if the blockchain is going to be wildly successful, how will it scale?

A coin that’s been going up a lot over the last month is Nasdacoin. In the first week of October, this coin was selling for 7 cents. Just over a month later it was changing hands for $4.91 — that’s an increase of 6,914.2%.

Is Nasdacoin being pumped? The 5% check who’s behind the coin and ask where it trades. A straightforward method to employ is to take a look at the website and ask yourself does it feel legit? If you take the time to check, you’ll see Nasdacoin trades on three unregulated exchanges, BTC-Alpha, Mercatox, and Crex24, and has a Multi-level marketing compensation system.

If you search for other cryptocurrencies that employed MLM as a compensation scheme, you’ll be able to construct a better understanding of the potential risk. It shouldn’t take too long for the dots to join up and lead you to Bitconnect. And from there you can form your own opinion.


Counter-Party Risk

The cryptocurrency markets are on the wild frontier of asset classes. One mistake the 95% make is they forget to factor in counterparty risk.

The 5% check market conditions — not just at entry, but also at the exit of a trade.

Trades don’t just happen, they are matched on an order book. On the left side, the bid, are the buyers. On the right, the offer, the sellers.

Prices go down, not because of selling, but because of an imbalance of orders in the book.

If there are 10 sellers on the offer with $50,000 to sell at $10 with no buyers on the bid at that price, then prices will go down to where the buyer's bids are in the order book. If there’s $10,000 of bids at $9.50, then offers will drop to this price, if sellers are willing to sell, leaving a balance of $40,000 on the offer. If the next bid for $15,000 is at $9.40, then $25,000 will be left on offer to the highest bidder.

But what happens if the next bid is at $5.00 or lower? It depends on the liquidity and the urgency of the sellers. Most of the time, liquid exchanges make a market for buyers and sellers, but sometimes, even in the most liquid and largest markets, orderly trade executions break down.

They called it the flash crash.

Flash Crash

Flash Crash

Most market trading today is controlled by algorithms. (as it was in 2010) Liquidity in an order book is also monitored by algorithms that look for market anomalies. On May 6th, 2010, at 2:32pm New York time, a large sell order was placed onto the SP500 e-mini futures exchange. This order caused a domino effect, and within minutes billions of dollars were wiped off stock values. Blue chip company stock sold at ranges between hundreds of dollars and a few cents, causing margin calls on trades and derivative contracts.

The market recovered quickly as the trades were cancelled, effectively resetting the exchange. As a result, circuit breakers were put in place to make sure this can’t happen again.

Traders engage in all sorts of practices to cause imbalances in an order book. Spoofing and front running are two tactics designed to upset the algorithm monitoring market order balances.

For all of the protection mechanisms put in place to dampen market volatility, markets will continue to crash in the future. If there’s no one on the bid and you are looking to sell, nobody is coming to the rescue.

You can’t back out of the deal and ask for a refund. And this is why managing risk is so important. The 5% have mastered the art of building a position, while not putting the price up on themselves, and they understand that getting out at the exact high is not only a high-risk strategy, it’s also almost impossible to do.

The reason is liquidity.

Trading

Trading

Look at the amount of trading that has taken place during the last twenty four hours in the highlighted cryptocurrencies.

If you speculate, especially over the short term, it’s important to check the liquidity of the exchange. You might look in hindsight at a chart and play the “if-only” script in your head, but it’s more difficult than it looks to get out of a cryptocurrency at a price near what you expect to receive.

Ask holders of Cardano, a top-tier cryptocurrency, how easy it was to get their sell trades executed when the price of Cardano went over $1.20 in early January 2018.

Cardano, at the time, was trading on just two major exchanges, Bittrex and Binance, but in December 2017, it was a problem to open a cryptocurrency account. Even the major exchanges couldn’t cope with the onslaught of new customers trying to get in on the action. Google “open cryptocurrency account” and set the date range of the search to December 2017. Bittrex, which at the time was handling the 3rd largest amount of cryptocurrency transactions, temporarily shut the doors — along with many others.

With no new customers, providing liquidity became a problem. The exchanges solved this by shutting down transactions in Cardano. If you owned it, it was impossible to sell it.

The 5% club take into account market conditions and understand charts shown in hindsight do not reflect the ability to exit a position at the prices shown. A chart is built from the mid-price, the price between the bid and the offer, and to record that price all a market has to do is to have one trade, regardless of size, get matched between the bid and the offer.

Using Cardano as an example of what can happen when liquidity is low when no new buyers are on the bid ready to take the other side of your trade, the 5% stop and ask, how are they going to take profits if the likelihood of liquidity disappearing is high.


Deep Fake

Price Cycle

Price Cycle

Expectations

Expectations

Are you a believer? In Smart Dust, we talked about two tools, the price cycle, and the hype cycle, used by the 5% club, to help give perspective on current market conditions and to analyse risk.

This week, Bitcoin, whose market capitalisation is still 52.5% of the entire cryptocurrency market, and whose daily volume is still about four times more than the other leading coins, made new lows for the year on massive volume.

How massive?

Log Scale

Log Scale

This is a log scale daily chart of Bitcoin going back to the end of price bubble number three in early 2013. The price action on November 14th, 2018 marked the second largest ever daily relative volume turnover.

If you take the time to look, there have been seventeen relative volume spikes that stand out from the surrounding days. How many spikes marked turning points in Bitcoin, to the upside, or to the downside? Sixteen out of seventeen, or 94% of them.

The 5% look at the context, taking note of where the volume spike occurred in relation to previous highs and lows and monitoring the levels of fear that’s associated with new lows, or the levels of euphoria at new highs.

Testing Zone

Testing Zone

When a market breaks to the downside on huge volume (the 14th of November is such a day) and closes in the lower third of the day’s range, it can be used as a proxy for a supply and demand imbalance. Yes, you might be thinking that this is obvious, but it’s what happens next over the following few days or weeks that the 5% place their focus on.

The cryptocurrency markets are highly correlated, but over the last few months changes have begun to appear.

Bitcoin and the top-ranked alt-coins experienced stand out or even huge volume turnover the 14th of November: Bitcoin had 615%, Ethereum 412%, Ripple 327%, Stellar 530%, EOS 415%, Litecoin 465%, Cardano 257%, Monero 383%, Tron 314%, Dash 559%, Nem 855%, and Neo 349%.

Only Bitcoin and Dash made new lows on this amount of selling. Cardano matched a previous low, but all the others held above their prior lows.

Ripple Aug 14 Low

Ripple Aug 14 Low

This is Ripple’s performance since its 14th August 2018 low. On August 14th, 2018, Ripple made a new low for the year on 286% of average volume turnover, closing near the high of the day.

Ripple - Emotion Bar

Ripple - Emotion Bar

The 5% have a name for this type of price action. An “Emotion Bar.” The buying tail, measured from the close of the day range to the day’s low is expected to be tested in the future. During mid-September, the emotion day buying tail zone was successfully tested; then, over four days, between the 18th and 21st of September, Ripple’s price surged to the upside. Ripple moved up 89.9% on relative volume of 290%, 178%, 377%, and 750%.

Ripple announced it was launching xRapid, and making it available to commercial partners. The reason behind the move is because xRapid is the only Ripple product that uses the Ripple currency XRP. (xCurrent and xVia do not)

For the last fifty-seven days, Ripple’s XRP has traded within the range between the 20th of September low and the 21st September high.

Ripple 11 October - Low

Ripple 11 October - Low

On the 11th of October 2018, XRP dropped in price by 18.5% on 231% of average volume. The low of the down day was 37.2 cents, 43% above the lows of the September 20th demand surge.

When the 5% see lows being made on high volume, above and nowhere near a low, it is a sign that new demand has entered the market at higher prices — and that’s bullish.

Ripple 11 October - Low

Ripple 11 October - Low

The 11th of October low in XRP was tested with emotion bar price action on the 14th of November. Over the next four days, when Bitcoin moved to new lows for the year, losing over 17% at one point, XRP held its recent low and traded higher over the next four days.

The emotion bar reversal in XRP on the 14th of November took place 63% above the year to date low, as Bitcoin made new lows.

The 5% know the cryptocurrency markets are highly correlated, but recent price action in the top-ranked coins is challenging the normal cryptocurrency market state of high positive correlation.

The 5% don’t wait to be told. They observe market conditions. A permanent decoupling between Bitcoin and the top-ranked alt-coins will be a significant behavioural change and will change the nature of the cryptocurrency markets.


Location Location Location

There are two types of fear. The fear of missing out, and the fear of loss. The 95% panic when markets breakout to new lows. They just can’t take the pressure of losing and so they fold.

The 95% trade with their emotions, but the 5% trade with their heads.

Fear

Fear

When markets break to new lows, and the 5% see high volume down days, closing in the lower third of the daily range, they know that fear has entered into the market.

When a market breaks out to new lows, ask yourself who is doing the selling? Is it the professionals who know what they are doing or is it the retail 95% crowd?

Not all emotion bars are equal. The 5% look at the context. They observe the location of the emotion bar relative to where they estimate the market is in the price cycle.

The 5% take note of emotion bars appearing in two locations.

Bitcoin / USD

Bitcoin / USD

The first is after a prolonged down move. The February 6th, 2018 low of Bitcoin exemplifies this behaviour pattern.

From the all-time high Bitcoin made a series of lower highs with each leg down ending in an emotion bar. When the 5% observe an emotion bar in any market, they first check the location, but wherever an emotion bar appears it is expected to be a pause in the down move. If an emotion bar does not pause a market, the 5% expect lower prices.

The general steps the 5% take, when they see an emotion bar after a prolonged down move (the 6th February low in Bitcoin is an example of this), is —

  1. They look at the prior price action and look for the presence of lower highs, looking for a waterfall pattern, where each drop from a rally is faster and more intense.

  2. They take note of the emotion bar buying tail (the low of the range to the open or close of the day, depending on which is the lower), and they look to the left to see if the buying tail is at a location where previous demand (buying) entered the market.

  3. The take note of the range of bar, and they also take notice of the volume.

BTC/USD - Look Left

BTC/USD - Look Left

The 6th February 2018 buying tail in Bitcoin is located after a big move down and is preceded by a waterfall cascade of rallies followed by vicious price drops. The buying tail is at the exact location of the November 12th, 2017 low in Bitcoin at prices that marked the beginning of Bitcoin’s final move up to its $19,666 high (Using BitStamp data)

Location of a range of prices

Location of a range of prices

The grey box marks the location of a range of prices. The 5% expect this range to be tested before prices go higher. Over the next nine months, Bitcoin tested this area four times. If you look, you’ll see at no time did Bitcoin make a higher high.

The testing zone area in the grey box matches the expected behaviour of a new technology after it completes stage two of the Gartner hype cycle. (Read Smart Dust)

BTC/USD - On the 14th and 15th of November, Bitcoin lost over 17% and tested the bottom of this zone

BTC/USD - On the 14th and 15th of November, Bitcoin lost over 17% and tested the bottom of this zone

The second area the 5% look for emotion bars is around the lows of testing zones created by an emotion bar. On the 14th and 15th of November, Bitcoin lost over 17% and tested the bottom of this zone.

The zone represents stage two of the price cycle, where prices trade in a sideways range as a market, in this case, Bitcoin, is accumulated by the big players.

Remember, no financial market moves like clockwork. Most of the time market behaviour is random, but sometimes markets become less random. (We’ve discussed this using the MIT blackjack team in many previous articles.) If prices break below a sideways accumulation phase, markets move into a condition where they are more likely to act less randomly.

Why?

The 95%, the consistently unprofitable, mainly either follow the news or their Guru of choice. The news, for the most part, follows the price action — bad on a down day, good on an up day. The majority of these traders don’t use a point of reference. They concentrate on the potential profits and not on the risk.

Without the tools needed to win, (read Shapeshifter) the 95% have no point of reference, so when they are losing money, the look to their Guru, any Guru, for an emotional crutch. They need to be told how to act in their own best interest.

The 95% search for an article that supports their opinion, but the fact is most articles regurgitate the same information.

When the clock is ticking, and the 95% are losing money on every tick, it is only a matter of time before they capitulate.

This is more likely to happen when prices break down through a testing zone. Realise that an emotion bar is the 95% throwing in the towel. Ask, who is taking the other side of the trade? If you think it’s the 5%, you’re correct.

This is why trading and speculation is so difficult. Financial markets (including cryptocurrency markets) are perverse.

When the only way is down and the majority of articles and media news point to lower prices, the opposite is more likely to happen.

It’s important to understand the 5% aren’t always right. The difference between them and the 95% is the 5% use risk management tools to control risk, and they have an understanding of market conditions. If a market does not act “right,” they get out.

BTC/USD - On the 14th and 15th of November, Bitcoin lost over 17% and tested the bottom of this zone

BTC/USD - On the 14th and 15th of November, Bitcoin lost over 17% and tested the bottom of this zone

The 15th of November brought in an emotion bar at the second area the 5% expect them to appear. Bitcoin dropped $360 under the low of the testing zone, but by the end of the day, Bitcoin prices had recovered back into the zone, closing near the high of the day on 450% of average volume.

If Bitcoin fails here, the probability of Bitcoin going down further increases. The 5% will flip their opinion on the sideways move being an accumulation phase in the price cycle and instead label the sideways action as distribution within a downtrend.

If Bitcoin is about to enter another leg down, the 5% will observe Bitcoin’s market dominance during the price drop. Ripple, Stellar, Ethereum, EOS, Cardano and the other top alt-coins should follow Bitcoin down.

If the top-ranked alt-coins keep making higher highs, while Bitcoin is making lower lows, the 5% would recognise a behavioural change in the cryptocurrency marketplace.

If Bitcoin fails to hold the lows, what was support, the bottom of the testing zone at $5,920 (using BitStamp data), will become resistance. And using the price action of Bitcoin during September and October, a second higher level of resistance is in place in the centre of the testing zone at $6,080.

If the November 15th emotion bar low fails, the 5% flip support into resistance. Bitcoin would have to break $6,080 for them to change their opinion of what is most likely.

So, the next question is, if the emotion bar low is taken out, how far down can Bitcoin go?


Plunge Protection

Bitcoin has had four price bubbles.

  • Bubble #1 ended in June 2011. Bitcoin prices dropped 93.76%.

  • Bubble #2 ended in April 2013. Bitcoin prices dropped 75.41%.

  • Bubble #3 ended in December 2013. Bitcoin prices dropped 86.89%.

  • Bubble #4 ended in December 2017.

Using price data from BitStamp, the all-time high in Bitcoin is $19,666.

The low of the testing zone, marked by the 6th February low in Bitcoin of $5,920 is a drop of 69.9%.

The average of the three prior bubble drops is 85%. $19,666, the all-time high, minus 85% gives a possible price target of $2,950. A more conservative drop of 80% gives a price of $3,933.

Anyone who bought in during the sideways move at a price of $6,400 will be down 53.9% if Bitcoin hits $2,950.

The back to breakeven formula is Y = X / (1 - X) so, if you bought Bitcoin at $6,400 and it trades at $2,950, Bitcoin would need .539 / (1 - .539) or 116.91% return to get your investment back to breakeven.

The 5% don’t forecast the future. That’s impossible. Remember Biff’s Almanac from the Ignitus article? If you knew with 100% certainly what is going to happen tomorrow, you’d own the world. The key is you don’t — but neither does anybody else.

The 5% don’t forecast Bitcoin going down to X or up to Y. Instead, they observe the price action in front of them and use points of reference generated by direct market feedback (the interaction of supply and demand), to control their risk.

BTC/USD

BTC/USD

Bitcoin has proved it can recover from massive price drops, but just because Bitcoin has done this in the past does not mean it is guaranteed to happen this time.

If Bitcoin prices collapse down, the 5% look to the left and check if the 85% possible price drop from the all-time high coincides with a level of prior demand. Take the time to look, and you’ll see it does. The September 2017 low in Bitcoin is at this level. (Using BitStamp data)

On the way down, the 5% won’t be forecasting how low Bitcoin can go. They’ll instead be looking at the top tier alt-coins. If they hold their lows and breakout to new highs, a market shift will have occurred.

The 5% don’t know where the Bitcoin low is. And neither does anyone else. They react to emotion bars in a downtrend and use them as a point of reference to control their risk.

The 5% don’t need Biff’s Almanac to be successful, because they know a secret. Ready — “In financial markets, including the cryptocurrency markets, the best loser wins.”


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Does a market react to news or does news react to a market?

Does a market react to news or does news react to a market?

 For cryptocurrencies to replace cash does anything have to change?

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