Market Timing in Crypto

A chattier version of the AltcoinTrading.NET strategy post on market timing in crypto: https://www.altcointrading.net/strategy/timing/

About market timing

Market timing has a bad rap.

They say that “Time in the market beats timing the market.”

But this saying was coined in the heyday of stock trading, when it was still reasonable to assume the markets will just keep going up.

Luckily, it is certainly possible to tell whether it is time for daring or time for caution.

That’s what timing tools are for.

MARKET TIMING APPROACH

Market timing is a method to learn about the state of the industry as a whole. In our case that is the crypto industry.

To learn about that means to learn about what’s happening on all crypto markets, even the ones you consider irrational.

Focusing on a single market is a mistake if you want to learn market timing, but it is easy to do if you only rely on plain technical analysis.

Only going by TA on a single market is missing critical information.

Case in point: You only trade BTCUSD, so you only watch BTCUSD. This way you miss the information about money leaving crypto altogether. BTCUSD is the strongest market of the industry; the outflow of money will take the longest time to show on the BTCUSD market.

MARKET TIMING IN CRYPTO

Market timing can be done with the help of technical tools as well as via softer metrics. You will get the best results if you combine both these approaches.

The technical market timing approach

The simplest technical way to look at crypto markets on the whole to use basket indexes.

Crypto indexes have been around since 2017 — since the first mainstream boom of crypto.

They are not as complex as indexes for the legacy markets, but they are already good to be used for market timing.

The non-technical market timing approach

Then there are non-technical ways that help you assess the state of the markets: the market psychology and the public psychology.

Legacy market timing toolset includes things like unemployment rates, treasury yield curves, weekly and seasonal cycles and developments in industries that are most sensitive to changes in general psychology (such as entertainment or health industries).

Crypto is not immune to changes in public psychology.

The money flowing into markets are the same, it is just the preference of the instrument that differs (crypto or stocks).

Crypto in particular can be perceived either as higher risk asset or as the only safe haven, that depends on what the investor personally believes.

In the next section, we will explain how to use crypto indexes for the technical approach, as well as how to use market metrics for the non-technical approach.

After that we’ll give you a list of tools currently available

Lastly, we will give you a simple example.

TECHNICAL MARKET TIMING TOOLS

HOW TO USE CRYPTO INDICES

The easiest way that requires minimal skills to plot the price action of the basket index together with the price action of a single cryptocurrency, and see how they compare.

This is a simple way to understand how money moves through the cryptocurrency markets.

Tools that let you compare a basket index with a single crypto are readily available too:

• Plotting multiple charts even with custom data is easy with TradingView PRO.

To check whether your market or the index moves at faster pace, use even very basic technical indicators:

• ROC (Rate of Change).
• RSI (Relative Strength Index)
• Advance/Decline Line
• Intraday Intensity Index

The Advance/Decline Line is an indicator worth learning about to use with basket indices. There is an easy “divergence” signal that shows the ends of market cycles.

• The ADL topping signal is found when the price of the constituent assets is not declining yet, but the ADL already is.
• The ADL bottoming signal is found when the price of the constituent assets is not rising yet, but the ADL already is.

The Intraday Intensity Index is more useful for looking into money flows within a single cryptocurrency market.

NON-TECHNICAL MARKET TIMING TOOLS

Cryptocurrencies have their own market metrics that we can draw conclusions from.

1. Growing non-speculative transaction rates are a signal of strength:

• Growth in transaction rates is a positive signal in general.
• Majority of transaction activity coming from native applications or p2p value transfer (depends on the focus of the cryptocurrency) means a stronger market. The opposite would be a market held up mostly by trading activity.
• Out of the trading portion of the transactions, coin bought without leverage is seen as non-speculative compared to coin bought on margin.

Any leveraged long has to be closed eventually. It might help prop the market higher, but it is also a promise of a sell order in the near future.

Crypto bought without leverage is a store of value, typically not to be sold any time soon.

You can suss the amount of speculative bets from open interest data at popular leveraged exchanges.

• For payment-focused cryptos, there are additional fundamentals such as the growth in ATM count, merchant adoption or p2p markets growth.

2. Growth in decentralized applications can be either good or bad.

• Popularity of games like Cryptokitties may get more people into cryptocurrencies, but it may also have adverse effect on the cost of transactions.

3. The signs of irrational exuberance are the same in legacy and crypto market as well.

• Your grandma buying crypto at the Christmas dinner and attempts to buy bitcoins on credit are pretty clear.

Your Tools

DATA VISUALISATION AND ANALYSIS

Plotting multiple charts and even custom data is possible with TradingView PRO plans.

MARKET CAP WEIGHTED CRYPTOCURRENCY INDEXES

These crypto indexes were modelled after S&P500, with some modifications. Their constituents change much faster than on legacy markets. Any altcoin of the week easily gets among the top coins by market cap without even having a product or doing anything special, so it’s important to consider that.

• CCI30 — cci30.com is a basket of top 30 coins by market cap (excluding stablecoins).

The constituents are automatically updated. The index was created by mathematician Igor Rivin and economist Carlo Scevola. This index is currently used by thecryptosfund.com where you can invest in the basket of cryptocurrencies of CCI30. Depending on the broad trend, it may outperform just holding bitcoin.

This is the better choice for statistics and as a timing tool.

• Crypto20 — crypto20.com is a tokenized index that can be traded on some altcoin exchanges.

This is the better option if you want to trade a basket.

PRICE WEIGHTED CRYPTOCURRENCY INDEXES

• CryptoCompare — cryptocompare.com

CryptoCompare uses the VWAP approach (Volume Weighted Average Price) taking into account the past 24 hour volumes. That would be the only price-based crypto index right now.

Other sources worth mentioning

• Santiment — santiment.net

Santiment gathers data on all ERC20 tokens and draws insight from that. The data is publicly available at SANbase.

Santiment tracks crypto-specific metrics such as developer activity on Github. Other lines of focus include crowd sentiment from social media, network activity and large transactions tracking.

This would be an attempt to quantify some of the “softer” metrics like market psychology.

A SIMPLE EXAMPLE

Let’s say you are plotting BTCUSD over CCI30.

You want to understand how money moves through the crypto industry and whether the markets are in good shape.

First let’s make a mental note of what you are looking at:

• BTCUSD is the strongest asset of the industry
• CCI30 is a basket of any altcoins that happen to have large market cap at the moment.

We will need to compare the price development these two and use a technical indicator ROC (rate of change) to see which one is moving at faster pace. You can do this on TradingView.

When you plot these two, you will see one of the following scenarios:

1 - The price of BTC is growing at a faster pace than the price of the index

BTC can outperform the index in two ways —

a) Both BTCUSD and CCI30 go up, but BTC goes up faster

b) BTCUSD is advancing, CCI30 declining

The situation is the same in both cases, but its intensity is higher taking place in the b) scenario, that is when there’s the divergence.

This says that money is leaving altcoins and gets into BTC.

• It can mean the end of alt season, or even just and end of a speculative trend. Let’s say, in 2020, people could be losing interest in DeFi.
• It could also mean that overall bull market is over. As BTCUSD is the strongest asset, its price action doesn’t reflect the end of the bull yet.

2 — The price of the index is growing at a faster pace than the price of BTC

The index can outperform BTC in two ways —

a) Both BTCUSD and CCI30 go up, but CCI30 goes up faster

b) CCI30 is advancing, BTCUSD declining

Again, the situation is the same in both cases, but its intensity is higher taking place in the b) scenario, that is when there’s the divergence.

This says that money is flowing into altcoins.

• The direction of the money points either at the increased interest in speculation, or at a real fundamental change at the market.
• Maybe there is actually a viable DeFi application, maybe there is a new altcoin to dethrone BTC.

There are literally no other options.

Now, each of these situation generated a number of claims about the state of the crypto industry.

In order to see whether it’s time to buy more or a time to look for exit, you will need to determine which one of the claims has the best odds.

To verify the odds of any of these claims, apply the technical analysis tools as well as the non-technical market timing methods:

• Advance Decline Line
• ROC
• Transaction activity
• Public transactions vs exchange transactions
• Market sentiment
• General public psychology

The advance decline line in particular can give you an early sign of global top or bottom.

• The ADL topping signal is found when the price of the constituent assets is not declining yet, but the ADL already is.
• The ADL bottoming signal is found when the price of the constituent assets is not rising yet, but the ADL already is.

If you want to try it hands on, some datasets from back in 2018 are available here: https://www.altcointrading.net/strategy/timing/#some-data-for-you-to-play-with