Navigating The Ebb And Flow Of Money In Crypto

By Sergey Vasin on ALTCOIN MAGAZINE

Sergey Vasin

Published in

The Dark Side

5 min readJul 3, 2019

This year bitcoin once again shows outstanding performance. Such periods are always full of enjoyable worries for crypto investors. How to increase the value of your portfolio not only in USD but also in BTC?

There are several tactics to succeed in this far from a simple matter:

active trading of BTC/USD pair,
investing in altcoins with smaller capitalizations,
constant transitions between BTC and altсoins.

In this article, we are going to look at some fascinating patterns and interdependencies in the crypto world that may help you decide which strategy to employ.

Correlations And How We Should Treat Them

You’ve probably heard that cryptocurrencies are highly correlated and seen a matrix like that:

A correlation matrix is a table showing correlation coefficients between variables. The coefficient indicates the strength and direction of a linear relationship between two random variables. In our case, between the prices of two coins. A correlation coefficient is always between +1 and -1. A value of 0 indicates that there is no linear relationship between the prices of two coins. A value of +1 indicates that the prices perfectly mimic each other, a value of -1 is the same as +1 but the prices change in the opposite directions.

The table shows some useful information:

“herd behavior”, major coins follow along pretty much the same path
diversification opportunities among the top coins are not that great since there is evidence of a strong positive relationship between them. Hint: to effectively diversify you need low/not high correlations among portfolio constituents.

Does it mean that you should hold only BTC and, say, ETH and stop striving to beat the market? For beginners and some passive investors, this strategy may save time, nerves and significantly reduce the number of mistakes. Active market participants, though, need something different.

The matrix is important, indeed, prices of altcoins are highly dependent on BTC price. Despite that, these price movements are not perfectly synchronized, thus creating opportunities for active decision-making.

Communicating Vessels

Have ever noticed that when BTC is strong and is about to skyrocket, altcoins stand humbly in its shadow? Bitcoin literally siphons funds from other cryptocurrencies forming a “tsunami” effect when a sudden low tide precedes a huge wave. When the run is over, and BTC is on break, money flows back to altcoins which, in turn, come to the forefront quickly closing the gap. This pattern recurs consistently in the bull market. For a better understanding, let’s take a closer look at the recent surge of BTC in the context of some large-cap altcoins quoted against it.

You can clearly see the phases in which BTC moves up absorbing money from the market and where it takes a break allowing altcoins to get their share of glory. (A live chart can be found here. To create one in your TradingView account, you need to press the “Compare” button at the top in the “Chart” mode and add altcoin vs BTC pairs to the BTC/USD chart)

A reasonable question, how to take advantage of this information? Money flows can be used as an additional indicator when assessing the power and direction of the future BTC price movement. Let’s study the situations when this chart might be useful by highlighting several sectors on it:

Similarities of these sectors: all of them follow BTC growth, and throughout these periods BTC is traded in a narrow horizontal channel.

Differences:

1,4,5 — altcoins decline in BTC (marked by arrows on the chart);
2,3 — altcoins appreciate in BTC.

What Happens Next:

1,4,5 — BTC price growth;
2,3 — BTC price correction.

Explanation From The Money Flows Standpoint:

1,4,5 — money continues to flow into BTC fuelling the following impulse;
2,3 — money flows away to altcoins which, in turn, rapidly close the gap and then switch to the correction phase along with BCT.

The following observations could be highlighted:

Other cases are much less frequent.

This article is based on simple market observations. In the second part, a computer analysis could be made to find more interdependencies and even calculate the success rate of the predictions.

For now, let’s move back to 2017 and look at the market in the context of our article.

Hindsight

On the road to 20k in late 2017, the same pattern was present. Money has been moving between BTC and altcoins forming similar cycles.

After 7 Dec ’17, following correction of BTC, altcoins, ignoring its further movements, were steadily appreciating in BTC. Around the red vertical line, where altcoins began entering the “green zone” against BTC the market finally collapsed. It does not mean that the next huge correction will be happening in the same way, however, when BTC/USD and altcoins/BTC stop moving in the opposite directions, you should be especially cautious.

Conclusion

Described patterns can help you understand the power and direction of future BTC price movements. Active traders can use it while switching between BTC and altcoins. Remember, this indicator should not be used as a decisive factor, but rather as a supplementary tool to your view of the market.