TradeStates applied to Bitcoin (BTC)

TradeStates itself is described in another post. Basically, TradeStates generates trading signals (Buy/Hold/Sell) on any symbol thrown at it, based upon non-stationary volatility and other characteristics of that symbol’s price dynamics.

Today at 18:00 UTC, Bitcoin is down more than 8% compared to 24 h earlier, following a ban on ICO’s in China. This fall in price is not in the charts below yet because these charts were made yesterday and refresh once a day at 24:00 UTC. But to many people the question arises if such pullback is indicative to either exit their current trades (narrative: ‘disaster will strike, it will continue to decline’), or alternatively to start new trades (narrative: ‘buy the dip, it will go up after again’). The TradeStates method can be a great assistant to objectively and emotionlessly help in making these decisions.

Bitcoin (BTC) is different from stocks or ETFs in that BTC has no closing (EoD) price, since it can be traded 24/7 including weekends, and is traded on many exchanges, all having a (slightly) different price at each moment. When acquiring BTC price data for quantitative analysis this has to be considered. I chose to solve these issues by obtaining raw daily BTC data from Bitcoinity, in which the parameters have been set up such that the price per day for BTC is averaged across all exchanges and across all 24 hrs of every day (00:00 UTC to 24:00 UTC). This method works well and is highly suited for the subsequent TradeStates analysis, but please realise the double averaging of BTC price data applied here, which can only act as a proxy for actual prices of trade executions.

Because of the huge price range (and for many other reasons which will be explained in subsequent articles) here is the same chart with a logarithmic y-axis:

The following observations can be made from these charts:

The TradeState of BTC is currently Green, as it has been for the last 47 days. From 1 Jan 2014, only one contiguous trade is detected in BTC, from 30 July 2015 and still active today. The cumulative result in this trade is an impressive 1469.42%. Volatility has been gradually falling over time for Bitcoin, as indicated by the diminishing distance from the top of the Green band to the bottom of the Orange band (the latter is the the Red stop line). Bitcoin’s volatility coefficient (VC) today is 37% while on 1 Jan 2014 it was still 74%. BTC’s current VC of 37% compared to the S&P500 current VC of 9% is a factor of approx 4. This is much less than expected initially and means in practice that a position in Bitcoin is ‘only’ 4 times as ‘risky’ as an investment in SPY. Bitcoin is currently in the Green zone and has been like that for 47 days. It has dipped a few times in the Orange zone. It appears that these events were good buying opportunities for the novel investor in Bitcoin, since every time this happened, the price returned back in the Green zone. The cumulative result compared to volatility, expressed as the Sharpe ratio, is extremely high (13.66 compared to SPY 1.71).

On 16 July 2017 the BTC price fell deep in the Orange zone, approaching the Red stopline. But the next day BTC was up again, preventing to push us out of the trade.

The most important figure from this analysis is perhaps the Stop price, which currently sits at 3016 USD/BTC. When following the TradeStates methodology, whenever the price drops lower than that it might be best to get out (permanently or for a while) until TradeStates detects a new Start. This Stop price is not fixed though, when BTC makes a new high (which happens quite frequently) the stop price moves higher. The price for entering the Orange zone, currently 3736.58 USD/BTC, is another relevant level, because it indicates a great price to ‘buy a proper dip’. That is to say ‘if it ever happens’ of course. But in general the TradeStates method will trigger such events nicely and they can then be used to the advantage.

At the moment of writing Bitcoin price is roughly 4172 USD/BTC, and thus still comfortably in the Green band, with a wide margin still to the top of the Orange band. In other words: the TradeState of BTC is Green and there is no reason to either consider buying, adding or selling your bitcoins. Just hold them.

Richard Smith of TradeStops comes to a very similar conclusion and earlier here on Bitcoin.

I intend to write some follow ups on the TradeStates analysis applied to BTC and other symbols. Also, I am considering a free service to share these TradeStates signals publicly on a daily basis, on some of the most widely traded instruments. Let me know if you would be interested in receiving these.

Disclaimer: This article was written for informational purposes only, and is not intended as personal investment advice. Practice due diligence before investing in any investment vehicle mentioned in this article. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it.