Decrypting the BitCoin CryptoCurrency Black Box


Professional money managers have something in common with good physicians; first do no harm. To accomplish this specific goal: not losing money, they often move their investments in and out of various equity markets as profit opportunities and risk dictate. This produces a clear and traceable indication of how these professionals view various market opportunities and how those attitudes are changing based on news, volatility and market conditions. Just fellow the volume as it does represent their money. The goal is to move out of something risky, but was highly profitable, into a safe storage of value until whatever market churning gyrations you were escaping have passed. You repeat this process; make money, preserve money, as often as necessary.

Opportunities that allow you to make less or no profits, but are vault safe holders of monetary value include bonds, treasury notes, gold and interest-bearing certificates. Some large cap stocks have this status as well.

Bitcoin has never been on this safe haven list, but that may now be changing.

There is an excellent Medium article that describes the illusions of the inherent value of money including the US dollar. “You Don’t Understand Bitcoin Because You Think Money Is Real,” by Maria Bustillos. Bitcoin is an investment vehicle, a transactional device and most importantly a place holder of value. It is now emerging as a value holding destination to park at-risk funds. As Bitcoin becomes better understood, the benefits of this option will become more widely accepted and adopted. The advantages of high liquidity, worldwide acceptance, frictionless transactions and maturing creditability will transform this cryptocurrency into a mature financial investment vehicle.

The concept of “going to Bitcoin,” has already been utilized in areas of the world that have experienced severe financial crisis including Cyprus and Turkey. Individuals in these situations have experienced very high inflation, wild currency devaluations, or astronomical increases in taxes. These individuals were out of options, but successfully resorted to fleeing to Bitcoin to retain value. Yes, they did it as a last result, but any port in a storm when your financial life is on the line. To underscore this concept, Grayscale just published a study advocating that Bitcoin is becoming a hedge against a global liquidity crisis.

Bitcoin, the internet of money has experience rollercoaster-like volatility. The result is trading Bitcoin or any cryptocurrency still carries a higher level of risk than many other publicly traded equities. This high volatility seems to be waning as the realization of its benefits emerge.

Bitcoin dropped at least 25% on two occasions in 2017 and 58% in just one jaw-dropping six-day plunge last December. It also lost 84.29% of its value during 2018 declining from $19,891.00 on Dec 18th 2017 to $3,124.00 on Dec 15th 2018. (See chart above) Since its low on Dec 15, 2018 to June 18, 2019 it has increased $6,076.

Looking for Correlates of Bitcoin Market Movements

The following series of charts compares various equities, indicators and markets against Bitcoin looking for leading or lagging correlations. These charts demonstrated the emerging, changing attitudes surrounding bitcoin.

The strongest leading indicator of a surge in Bitcoin price is the number of times the term “Bitcoin,” has been incorporated as a search term on Google. (White line in chart above.) Google Trends provides this data. Each white dot to the right of the 2018 price peak indicates a spike in the number of searches conducted for that term. Each spike is strongly associated with a corresponding spike in price for the equity BTCUSD. Currently the most recent Google trends for the term “Bitcoin,” occurred on May 12–18 2019. The corresponding increase in price from each trend spike is approximately 10 trading days or two weeks.

The Nasdaq index IXIC was less insightful. With a vivid imagination you could still make a case that Bitcoin is a leading indicator to market direction for the Nasdaq. You could also make a case that as Bitcoin becomes more stable and accepted as a viable financial instrument, that a stronger correlation is growing between the two as evidenced by the far-right hand side of this chart.

The VIX provides a good example of a divergent correlation. As the volatility of the markets increase, the price of equities declines, as the volatility decreases the price of equities increases.

If Bitcoin is maturing and becoming more trusted as a parking place for money during high volatility, then we should start seeing a strong correlation between the VIX and increases in Bitcoin. This correlation is evident at the extreme right of this chart. As there is no correlation preceding this last event, utilizing volatility as a leading indicator for Bitcoin will require more time and data. A corrolation appears to be emerging, but it still too early to make any definitive declaration.

Gold, another recognized safe harbor (Gold line in chart above) is also starting to move in tandem, mirroring Bitcoin in trading patterns. Again, Bitcoin seems to be a leading indicator of Golds future price direction. This is another indication that Bitcoin is maturing and becoming a place holder for value.

Effective Cryptocurrency Technical Analysis

As a high-tech addition to the monetary infrastructure of the world, technical analysis has been applied to the trading of Bitcoins since they first appeared. Effective indicators to trade crypto coins are the same as for stocks, options, futures and currency pairs. Volume can be a very important secondary indication of the strength of any directional change in any equity. Bitcoin suffers from a very decentralized reporting system that could be perceived to be detrimental to accurate interpretation of real-time volume. This is actually not the case as a recent in-depth examination by Bitwise Asset Management disclosed. “Economic and Non-Economic Trading In Bitcoin: Exploring the Real Spot Market For The World’s First Digital Commodity,” by Matthew Hougan, Hong Kim, and Micah Lerner. This 104 page decertation details the accuracy and low price lag between exchanges.

Sudden drops, such as the one illustrated in the chart below, can have a devastating effect on all traders, but impact small individual investors disproportionately.

Moving average cross overs will alert you to this reversal, but with a significant lag or delay. Below is my trading setup incorporating multiple algorithmic filters and an advanced reversal alert system; the early warning system. The EWS does not provide trade signals. It is an attempt to generate effective warnings that your surveillance should become constant and intense until the reversal occurs or a conformation that a price continuation is occurring.

Bitcoins are still an emerging equity opportunity, both for technicians, long and short-term investors as well as professional money managers. It’s an evolving story and this investigation is a cursory attempt at finding order in what is still a somewhat chaotic picture.

Bitcoin is demonstrating all of the classic problems experienced by growing children. Terrible tantrums transitioning into stable, mature, adulthood. As we all know this process takes time. The chart above is again conforming that this process is ocuring and Bitcoins are becoming a more rational and consistent investment vehicle emerging into the realm of safe haven.

By contributing your observations and ideas we can build on these preliminary observations and hopefully start to build a meaningful and insightful model of effective leading, technical or trading pair indicators.

Thanks for reading and good luck with your trading.



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