Identifying Bull, Bear And Bubble Phases For Bitcoin
By chris on ALTCOIN MAGAZINE
Bitcoin is 10 years old and we can use the extensive price history to look for long term trends.
Below is the Bitcoin price in USD since 2012 shown on a log scale. In that period, the price has gone from about $4 to about $8500. That is an increase of over 2000 fold, or three orders of magnitude, hence a logarithmic scale is required.
A few words about the properties of log scales. Such a scale represents percentage increases rather than absolute increases. That is, a change from 1 to 10 is the same vertical distance as the change from 10 to 100, or from 100 to 1000.
In finance and investment one is mostly interested in the percentage profit or loss. So the justification for the use of log scales to show asset prices over the long term becomes apparent.
Let’s now examine the chart in more detail.
The chart shows the daily prices, the 100 day EMA (exponential moving average, blue), and a trend line (orange), which I call the Revert-To-Mean (RTM) trend line. The slope of the line represents a price increase per quarter of about 28%, just under 2% per week (or, one average the price doubles in just under 3 quarters of a year).
The chart shows 7.5 years of price data. The price broadly follows the RTM line but there are two phases, called bubble phases, where the prices far exceed the trend line and then when the bubble pops the price reverts to the mean described by the trend line.
The bubble phases have a strong correlation with the bitcoin halving cycles that are part of the design of Bitcoin. There have been two halving events in Bitcoins history so far. The first halving occurred on the 28th of November 2012, and the second on the 9th of July 2016. The next event is expected May next year (2020). The two halvings are marked on the chat as two light-blue vertical lines.
From the chart, we can make two additional observations. The bubble phases occurred in the months after the halving. Interestingly, the bubble phase after the first halving was split into two sub-bubbles. The second sub-bubble and the bubble following the second halving started about 6-9 months after the halving event. However, I expect that we may see some front running for the beginning of the bubble after the 3rd halving.
The phases between the bubble markets are characterized by a bear market, where the price declines, followed by an accumulation phase.
The accumulation phase between the 2nd and 3rd halving lasted 2 years from March 2015 to about March 2017. In this period, the price closely followed the revert-to-mean trend line, however, during this period the price did not exceed, but almost reached, the all-time-high (ATH) of the preceding bubble phase.
To translate these observations to the current cycle we are in, let’s zoom in on the chart (see figure below).
We can see that the bear market phase appears to have finished Jan 2018 and the bitcoin entered and accumulation phase in early 2019, evidenced by the price following the RTM slope. This short accumulation phase was followed by an aggressive bull run extending over 2 months to revert the price to the mean trend line.
If the price remains in the bull run( following the trend line slope) until April 2020 then the price will about $19,250, which is close to an ATH (all time high). This point is marked on the chart.
In 2020 we expect to transition from a bull phase to a bubble phase, characterized by a parabolic lift off from the mean trend line. I expect this to start in mid 2020.
The table, on the left, shows key dates and Bitcoin price levels projected by the RTM trend line.
Before finishing up I will discuss an alternative model that has recently grown in popularity since the release in 2018 of the book “The Bitcoin Standard: The Decentralized Alternative to Central Banking”, by Saifedean Ammous.
Stock-to-Flow Model
A stock-to-flow (SF) model for Bitcoin is described in the excellent Medium article by PlanB: Modeling Bitcoin’s Value with Scarcity
The web chart by digitalik.net also shows an automatically updated version of the model. The model can be written as:
Price(BTC in USD) = 0.4 x SF^3 , where SF is the stock-to-flow ratio.
The SF time series for bitcoin exhibits a staircase pattern, reflecting the halving events when the bitcoin (in)flow or inflation is reduced by half.
The fitted model shows very good correlation to the bitcoin price over a wide time span. However, like the trend line above, it is a fitted model, with two parameters.
While there are good arguments that SF, as it relates to scarcity, correlates to price for a given asset, Bitcoin differs from Gold and Silver in one important aspect: the declining inflation schedule for Bitcoin is known upfront, both in timing and in quantum.
The progressively reducing Bitcoin inflation does reduce the ratio of the number of newly mined coins compared with new fiat money flowing into the bitcoin market. Therefore, supply and demand are tilted in favor of demand. Bitcoin stock is not a direct consideration in the above.
Additionally, over time, the adoption is increasing as bitcoin grows in technical capability, usefulness, usability and ‘brand awareness’. Adoption generally follows an S-curve (see figure below). Bitcoin is still in the early adopters' phase, and therefore the demand increase is accelerating while stock inflation is, as we have discussed, decelerating.
Stock-to-flow plays a role but it is only one of the two competing factors, the rate of adoption is the other.
Quoting Travis Kling, Chief Investment Officer at Ikigai, from the interview in “What Bitcoin Did: Bitcoin and Financial Markets”:
…back to Network Effect , the only difference between BTC being undervalued and overvalue today, is what the future adoption rate of Bitcoin is going to be… there is a super-linear growth to that, that is Metcalfe’s law.
Thus, I would argue that the stock-to-flow model is of similar empirical nature as the trend line approach presented above.
Correlation is not necessarily causation.
I hope that the argument presented above will spark further debate.
Finally
The revert-to mean (RTM) trend line can be used to clearly characterize the phases of bitcoin into bear, bull and bubble phases:
- A bull phase is characterized by the price broadly tracking the slope the trend line.
- A bear phase is characterized by a strong trend against the RTM line.
- A bubble phase is characterized by a strong trend exceeding the slope of the RTM line
