The Great Bitcoin Power Curve
I have been involved in cryptocurrencies since April 2013, and have traded them quite a bit in that time, mostly in Bitcoin and Ethereum.
As well as considering fundamentals, I like drawing charts and doing Technical Analysis (TA) to inform my investing. I like using both Cryptowatch (http://cryptowat.ch) and Tradingview (http://www.tradingview.com) for charting. I am a fan of Elliott Waves (http://www.elliottwave.net/educational/basictenets.htm), Ichimoku Cloud theory as well as the work of Thomas Bulkowski (http://thepatternsite.com).
Anyone who gets too far into charting like I have knows that sometimes you draw a line on a chart and then forget why you drew it in the first place. Often a line will relate to a pattern that completed weeks or months before and is no longer of any interest, and can be safely deleted to help keep your chart tidy. Sometimes, however, they reveal something new.
On 6 January 2017 I had one of those moments. Bitcoin was down a bit from the highs it hit in the first week of 2017 (it reached $1139.89 on Bitstamp on 4 January), ranging between about $880 and $920). On the 4-hour chart and shorter time-frames, the price was bouncing off a line that I didn’t recall drawing, like magic.
The curve is the thick cyan line shown here. As these are logarithmic charts, power curves look like straight lines. (Strictly speaking, these curves should be referred to as power laws, as they are equations of the form f(x) = ax^k. However, I’ve always referred to them myself as power curves, so that language has stuck with me.)
I zoomed out and looked at some longer time-frames. There was definitely something unusual happening. Here’s the Daily chart for late 2015 to early 2017.
It looks like the curve was acting as resistance in late 2015, then the price surged above it for a while in mid-2016 before hugging it closely in June and July. The Bitfinex hack in early August pushed it back below the curve for several months before it surged once more in late-2016 to approach its previous all-time-high of $1163 in November 2013.
Reaching back further, we see the Weekly chart looks like this:
Again, there are periods in 2013 between the two big rallies of that year where the price hugged the curve closely.
As you can see, the historical prices for Bitstamp only start in August 2011, and the price was well south of the curve then. To go further back in time we need to look at charts for what was the Bitcoin exchange of the day, Mt. Gox:
So it looks like Bitcoin’s price first interacted with the power curve in June 2011, when the price peaked at $31.91 after starting the year in the $0.30 range, an incredible 100-fold increase in the price in just 5 months.
(I confess to tweaking the curve I originally drew a little to hit this peak. It makes very little difference to the values it’s printing now and is more aesthetically pleasing to me, anyway).
So, putting it all together, this is what the curve looks like for the entirety of the time Bitcoin has been traded on Bitstamp:
What the power curve shows about Bitcoin’s past
Now that we have a curve to stare at, can it tell us anything interesting?
One thing I’ve noticed is that when the bear of 2014 was playing out, the price did not drop below the curve properly until 13 January 2015. The price hit a low the next day at $152.40, and scrambled back up to the curve by 26 January, briefly exceeding $300. That really surprised me. It’s almost like hitting the curve ‘shocked’ the market into stopping its fall, like a diver belly-flopping into the ocean. Even though the price spent most of 2015 under the power curve, it never came close to its January low.
This sort of thing seems to happen a lot. Bull and bear markets alike eventually want to pull back to the power curve, and at times cling to it like a baby koala clings to its mother.
What the power curve might tell us about the future
As of today, 30 March 2018 (Good Friday), the market price of Bitcoin is about $7,000, well down from the December 2017 highs of over $19,000. But the power curve price today is about $1820 and is currently rising at a rate of approximately $3 per day. If one were to assume the downtrend in progress is not likely to stop until the price touches the power curve again, prices in the $2000–$2500 range suddenly not only look likely but necessary to stop the fall.
My personal view is that Bitcoin was in a continuous bull market from January 2015 to December 2017, and it needs a corresponding bear market to follow it (i.e., it can’t make new highs until it has had bear market of similar duration, at least 18 months long, but probably longer). However, are things so black?
The 2014 bear market was what Elliott would call a 2nd-wave bear market. By that, I mean the price hit its lows at the end of it. Therefore, the 2018–19?-20? bear market should be a 4th-wave bear market. These often take the form of a horizontal triangle of some sort, and the lows happen fairly early. For a bear market of say 30 months duration, the lows might happen after 6 months:
In other words, if my model is accurate, the price may oscillate around $7,000 for the next 2 years, using the power curve as support, before perhaps making new highs sometime after that. The trading strategy in such circumstances is simple but obvious — look to accumulate when the price flirts with the power curve at A, C and E, and be prepared to take profit at B and D.
Caveat Emptor
A power curve, by its very nature, will continue in one direction forever. There is no question that at some point in the future Bitcoin’s price will drop below the power curve for good. Bitcoin’s price might be far more than it is today, or far less, but irregardless be below the curve. TA works until it doesn’t. Most of the price of Bitcoin today is not based on how useful it is right now but a gamble on it becoming some sort of reserve global currency/store of wealth in the future. There are all sorts of arguments about why that belief may be misguided, which are beyond the scope of this article. But don’t lose sight of them whenever you risk money on Bitcoin or any other crypto!
Trivia
I used Excel to calculate the daily rate of increase, using the following data points:
Point A: 8 June 2011 0740 UTC $31.9099
Point B: 8 January 2017 0755 UTC $881.3
Number of days between A and B: 2041.010417
Ratio of price between A and B: 27.618388
Daily rate of increase = EXP(LN(27.618388)/2041.010417) = 1.00162722393838000, or about 0.163% per day.
To get the annual rate of increase, raise the daily rate to the power of 365.25, which gives 81.1% per annum.