Bitcoin LineUp: A linear transformation for price support modeling
Introduction
When beginners want to start on bitcoin, always they want to know when to buy. This article proposes a linear transformation of Bitcoin price to evaluate price support and to find the best entries on Bitcoin for an interesting hold strategy.
In a previous article, I proposed a new method based on Bitcoin Waves to model the price of bitcoin, pointing to buy and sell zones [1]. For this proposal, the Bitcoin Waves model intends to predict the next waves by approximating the future waves as linear combinations of prior waves.
Hence, the present study was designed to investigate the potential of Differentiation (Fundamental Theorem of Calculus) and Derivative Test for finding critical points, in other words, when you can buy and hold without suffering.
Bitcoin LineUp data treatment
Prices from Coinmetrics were used [2], 2010 to 2021. The four halving waves were investigated (2010 > 2012, 2012 > 2016, 2016 > 2020 and 2020 >2021). Next, the waves were submitted to the derivative test by calculating 1st and 2nd derivatives.
Data import, pre-processing and multivariate procedures were carried out using R software [3] with Signal Processing (signal) package [4]. All data processing was performed using the free R software from the R Foundation for Statistical Computing.
Bitcoin LineUp model
As a starting point for the optimization, the 1st wave was used (Figure 1). The derivative test was used to locate the critical points of the bitcoin price function. When in a zone, the 1st derivative tends to zero (f′(x)~0), it is considered an easy trade buy zone, because it is forming price support.
On other hand, when the 1st derivative reaches highs or lows values, it indicates a hard trade zone, just indicated for professional traders. If f´(x)>0, the market is increasing, if f´(x)<0, the market remains decreasing. The second-derivative test can help to find the time to sell, as can be observed in Figure 2.
The first important information from Figure 2 is that in the best moments to sell, the 2nd derivative is very negative. Next, the second important piece of information is the price support, it appears in a region with a gap between prices.
Similarly, 1st and 2nd derivatives were applied to the 2nd wave (Figure 3), 3rd wave (Figure 4), and 4th wave (Figure 5).
Despite the known fact that in the Bitcoin market there is human action in order to achieve the invisible hand of the free market, derivative tests could be useful for beginners and probably for professionals too.
Conclusion
Derivative tests have proven to be an excellent model for sensing support prices and can indicate time to sell. The herein Bitcoin LineUp proposed method for support prices determination is advantageous for beginners, especially in a difficult market to operate as bitcoin market. Additionally, this method could help to find the best sell zone.
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Acknowledgments
The author is grateful to Satoshi Nakamoto, Hal Finney, Nick Szabo, Changpeng Zhao, Sabrina Moraes, Fernando Ulrich, André Fauth, Criptomaníacos, and Vela Trader.
References
1. https://edgarmoraes.medium.com/bitcoin-waves-a-linear-combination-for-price-modeling-2b89f72e552d
4. https://www.rdocumentation.org/packages/signal/versions/0.7-6
