Boom-bust cycle? Think again.
Or how this Bitcoin market cycle is different from the previous ones.
If we evaluate price action and spend enough hours looking at the charts, we will find many repetitive patterns. And it makes sense — human’s psychology hasn’t changed, we still experience fear, greed and other strong emotions that have an impact on our financial decisions. Decisions that leave their marks on the chart — impulsive waves to the upside, large scale correction, time of accumulation and distribution.
That said, small nuances can make a big difference. So much that it distinguishes the winner from the loser. In this article, I will lay out my thesis and explain in detail why I find this bull cycle in many ways, shapes and forms different to the previous ones.
Key differences — this cycle is longer, composed of mini-bull cycles within the larger trend, has a higher volatility, e.g. deeper/longer corrections and steeper moves to the upside.
For the purpose of our analysis, we will split the topics discussed into two categories:
- Technical analysis and indicators
- On-chain Data
- Back-Testing and how we should adjust it
Have you heard the phrase that volatility in the Bitcoin market decreases over time? Yeah, forget about it for a minute as what we are seeing is far more exuberance in each direction than previous market cycles.
Let’s explore!
Technical analysis and indicators
1.Bollinger Band width or how volatility fares across the current and previous cycles
Please, pay attention to the green panel. Everything above the white line is high volatility and as you notice, in 2017 we had only a short period of ~ 6 months when price made its final expansion to the upside. Or speaking with numbers — we had ~ 1113 days between 2014 and 2017 that price never managed to get above that level. Back to the current picture, we’ve had two instances already — in Jun 2019 and March 2021 when price breached through that level.
2.The 1.618 Fibonacci and how to adjust that in the current cycle
If you remember from my previous article 5 Bitcoin Patterns You have Likely Ignored, I’ve explained the 1.618 Fib level and what a crucial effect it had during the 2017 parabolic run.
Let’s take a quick look:
Or put shortly — each time in 2017 (except for the final blow off top at 20,000$), we faced resistance at the 1.618 fib, followed by a 30–40% sell off and time of consolidation that gave room for price to recover before it continued upwards.
What do we see post 2019? Now, as experienced in March 2020, June 2021, Jan 2022 — it’s normal to have 50%+ corrections while still in a macro bull trend. And although price still respects the 1.618 Fib level, we don’t normally consolidate nor correct much there. Instead, we have a market structure that I like to call the top3 formation. Top3 is a bullish accumulation with 3 consecutive local tops with very small price difference in between. Corrections do happen, but they are smaller — 20–25% and the consolidation usually lasts about 30 days before another leg up. This is way faster than what we’ve seen in 2017. Fast, volatile markets are tough and vicious — most participants end up in the red and score severe losses.
Shortly put — on the way up, we move fast with smaller corrections. On the way down — we get vicious 50% + corrections. During the 2014–2017 cycle, that was not the case.
Speaking of mini-cycles, Fibonacci ratios, top3 formations and periods of consolidation, I’d also like to include something we didn’t see in the previous cycle:
3. Price is time! Or how impulsive and corrective waves form funny ratios together.
To understand Figure 4 better, I created a legend with a short explanation:
Legend:
Green Box = Impulsive wave up/mini bull market
Yellow Box = Bullish consolidation/Accumulation
Red Box = Corrective wave. Unlike the Yellow Box, we have a change in the market structure scoring lower highs and lower lows
White Box = Combined Time Spent (Impulsive wave up + Correction)
My thesis is that each wave up has a corrective move/ bullish consolidation wave. They both form a White Box, which is the combined time spent of both. Another wave up comes when the days spent in the green box are at 0.236 Ratio of overall combined days spent.
Let’s take April-June 2019 as an example — Green Box (Impulse up) = 85 days, Red Box (corrective wave) = 261 days or 346 days all together. Time spent in the Green Box is 85 / 346 or very close to the 0.236 Fibonacci level. We can find the same pattern repeatedly during the March -October 2020 and current market structure.
Yellow box, unlike the Red Box does NOT have a change in the market structure, e.g. lower highs and lower lows. It’s a period of lower volatility (cooling off), when price takes time to recover before another leg up. This is bullish as price can’t move forever to the upside, the trend needs to cool off and reset first.
So what other conclusions shall we draw? Well, I believe since this market cycle is so different from the rest, we could look at some on-chain and PA action in isolation to the previous cycles. Let’s have a look.
On-chain data is painting a different picture this time.
Dormancy refers to time spent since last used in a transaction. The Dormancy Flow is the ratio of the current market capitalization and the annualised dormancy value measured in USD. Or in Layman’s terms: the green zone is when smart money is taking cheap coins from dumb money and panic sellers. But that’s not what I want to cover here. Instead I want to point out how each time we faced resistance at the 1.0 level — surgical precision that called the 14,000$ and 60,000$ top in 2019 and 2021 respectively. Pay attention to how differently this indicator reacted during the 2017 bull run (blue circle). It was way easier and safer for the average market participant to stay in profit. Not convinced yet? Check the image below:
In figure 6, we find another way to explore the difference between the current and previous market, it’s the Adjusted Profit & Loss indicator I’ve created. It essentially takes the total Profit & Loss amount in USD and divides it by the Total Market Cap of Bitcoin.
This way we get an indicator that shows the amount of Profit/Loss as a proportion of the market cap. As BTC price grows, so will the market cap. Loss and profit will increase in total net amount, but it won’t give an adequate picture of pain/euphoria during the local highs and lows. A 50% loss is the same from 300$ to 150$ as it is from 6,400$ to 3,200$. If we look at both events in absolute numbers, it would appear the second event had a bigger negative impact on the network. Which is not necessarily the case.
As seen, the amount of pain during the 150$ capitulation in 2014 is very similar to the one we experienced in Dec 2018, although the price was ~ 20 times higher. We also move in faster, steeper lines as opposed to 2017.
Lastly, as seen in Figure 7 — unlike the previous cycle when we had more than 2 years of Short-Term Holders trading in profit, this time around they spend a significant amount of time in the red. And it makes sense — the market is faster, more volatile, hence — harder to read and trade.
Conclusions we can draw so far:
Well, there are several. For one — we are in oversold territory on most on-chain and TA indicators, while maintaining a bullish market structure on the higher time frames. This suggests a further continuation to the upside, according to my analysis — in Q2 2022 (Figure 4).
Second conclusion is that the market is, overall, more volatile and faster which takes the best out of short-term holders and new market participants.
Third, also covered in my previous article : ‘I am not F***ing leaving!’, we are following the footprints of internet adoption in the 90s. You see more and more countries, states, localities embracing Bitcoin and working towards making it a legal tender. That combined with long-term on-chain data like new active addresses, hash rate and others make me believe that the growth of the Bitcoin network will continue expanding. This of course could have a bullish effect on price appreciation in the long run.
Last but not least — the differences in both cycles will significantly impact the profitability (ROI) of some trading strategies. Due to the small trading history of Bitcoin, a lot of strategies are back-tested for the whole trading period of ~ 10 years. I’d definitely adjust that I put more weight to recent history — data post 2019 as market behaves very differently than before.
That said, please, always do your due diligence.
Disclaimer:
The content shared above is not financial advice.
The article focuses on a selection of patterns and tools I find interesting and is for entertainment purposes only.
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