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Monday, September 28, 2020

In depth analysis of Bitcoin & Altcoin cycles! What's next?

In depth analysis of Bitcoin & Altcoin cycles! What's next?

ETH/USD COINBASE:ETHUSD

Welcome to my first ‘Market Structure’ analysis and what this is all about are my thoughts on various topics relating to markets inspired by current market conditions, commentary from other people and so on. This isn’t the first time I write with this style as one of my previous market snapshot had a similar theme. In my opinion this is a more constructive way to share my thoughts and experience in ways that can stay relevant in the future and not just something that would be useful in the next week or so. The topic I am going to cover this time is ‘Bitcoin & Altcoin cycles’ with several others coming soon as well.

On the Bitcoin cycles there isn’t that much to say as it is one chart that essentially goes through various bull and bear cycles. No need to spend too much time here as the Bitcoin and Altcoin cycles go nicely hand in hand. For simplicity and accuracy I will only look at 2014–2017 for a couple of reasons: a. Both Bitcoin and Altcoins were tiny in 2009–2013 b. we don’t have much data about it c. Most coins at the time were lost and there were too many large hacks d. we had no price data for the first 18 months e. the main exchange (Mt. Gox) had most of its coins stolen and faked price data (Willy bot). To be clear I have looked at that cycle for BTC and for Alts, but only the altcoin data where somewhat useful and align pretty well with the 2016-2017 data.

Right now Bitcoin is pretty much at the exact same place as where it was in 2016 before it had its rally towards its ATHs. So far has had 3 golden crosses, pretty 4 year distance between its tops and bottoms… while even the way it capitulated and started building its current uptrend isn’t that dissimilar to what it back in 2015-2016. Some people deny the 4 year cycle and the success (so far) of the S2F model because the market has grown in size… and it can’t perform in the same way as it did in the previous cycle, totally missing the point. Bitcoin is still small, the fundamentals are improving every day and isn’t just a company or a commodity. It is something between a currency, a commodity, a company and a network at the same time, which is telling me that it is possible that halvings are the main driver here and market cap isn’t as imporant.

The first thing people need to know about altcoin cycles is that they are driven by Bitcoin’s cycles. I am primarily going to talk about the alt cycles (alt windows / alt seasons) in a bull market, which every crypto trader should understand and embrace. Whether people like it or not, most people in the world know about Bitcoin and not any obscure cryptocurrency regardless of how cool its tech or community is. Whether people like it or not Bitcoin is the largest cryptocurrency by market cap, volume and derivatives and it is being used as a trading pair for many altcoins or as collateral. Whether people like it or not the halvings are massive shocks in the system that do affect the psychology and liquidity of the market before and after.

So the question then is how does that play out and is the data backing all this? If yes, wouldn’t that be common knowledge and everybody knows this and therefore there is no edge? Well first of all human behaviour is cyclical, especially in this super volatile and virgin market. In this market there are many people that come and go all the time, but in the grand scheme of things it will continue to grow as people expect Bitcoin to grow (otherwise what are we doing here?) and therefore not everyone knows this. At the same time timing & appropriate altcoin selection really matter as things don’t repeat in the exact same way, plus there are all those people that are saying this *time is different*. Not only this, but the first big alt season occurs right after alts have gone down so much in USD and BTC terms, that there are barely an altcoin bulls left.

Now let’s see exactly what happens: once we get the first bottom in USD terms we are starting to see some sideways movement in both Bitcoin and altcoins. Then Bitcoin rallies several months before the halving and squeezes alts. That’s because many speculators are leaving alts to get back into BTC either in preparation for the halving or they simply see it go up while their alts stay down so they end up chasing. At that point everyone becomes a Bitcoin maximalist. This is the event that puts the altcoin bottom in vs Bitcoin and then alts start going up slowly. A few months before and after the halving people want to make more Bitcoin as most at that point are people who treat Bitcoin as their reserve asset, otherwise they wouldn’t have survived. Whales and greed take control in the market as sentiment improves after hitting rock bottom, there is talk in the media / crypto circles about how optimistic people are due to the potential appreciation Bitcoin will have in the future. That’s the reason everyone starts playing musical charts while Bitcoin is about 40-60% below its ATH , as it is still cheap and people want more of it. Sure there are people that have different objectives (more USD or more alts), but they are the ones that usually get burned. Then once the music stops playing the money flows back into Bitcoin , the accumulation is over and then it is just a matter of time for Bitcoin to get to new ATHs. Essentially this is the final stage of accumulation / re-accumulation. In this part it is usually coins that are newer and smaller, while older coins that haven’t capitulated (like XRP & LTC) stay flat or even bleed as most participants don’t really want to touch things that have nothing new to offer.

That was stage one, however before we get to stage number two I’d like to clarify a few things: Not all alts are the same, not all alts get squeezed, many alts have spectacular bounces and some alts trend along BTC . Of course the fundamentals of alts have improved a lot on all fronts, and especially liquidity due to the growth of stablecoins & Ethereum… but you have to remember that altcoins are a very inflationary asset class due to coins having high inflation (airdrops, bounties, staking rewards, validator rewards, high mining rewards, teams dumping etc etc) as well as many new coins/tokens coming on the market constantly diluting existing coins. Something that is also very important is that most investors don’t just hold one coin and once a few of their coins turn bad, they start selling everything they can to cover losses. On the other hand if things are going well they are more likely to not sell, while being more inclined to buy more and take risks. That’s why the market tends to move as one although every time there will one category of coins that outperforms (I.e Proof of stake, Privacy coins, DeFi etc) or some coins won’t follow the market at all. The point I am making is that even though yes there is progress in the altcoin space, the rules of the game are the same and when the tide is about to turn you have to get out and look for the next hot thing, as what was previously hot probably won’t be again. This is a fast moving and rapidly evolving market, but the supply-demand/liquidity dynamics haven’t really changed.

In stage number two Bitcoin is breaking above its previous ATH and every single holder is now finally in profit, while the world really starts talking about Bitcoin again. People are realizing that it hasn’t gone away despite everyone saying it was dead for years, whilst they remember how high it went. New entrants push the market higher as they are looking for the next Bitcoin as they think Bitcoin is expensive and alts are cheap. Usually they go for the top 5-10 coins and ones they’ve heard before like Litecoin that seem like cheaper versions of Bitcoin . At the same time whales go back into the same large coins that are more liquid and will have enough liquidity for them to exit when they’ve gone up multiple Xs. Finally Bitcoin holders/traders who like altcoins move back into them as they are all in profit and have the tolerance & capital to diversify. Everyone is telling their friends how much money they’ve made in altcoins, so it becomes a bubble. Once again everyone thinks fees are high, Bitcoin is old tech and so on… The end of stage two comes when altcoins go parabolic, while Bitcoin is either flat or going up slowly. Then everything corrects together and we move to stage three!

In stage number three Bitcoin is going up and up, while everyone is getting rekt in alts. Alts then start going sideways in USD or BTC as Bitcoin keeps going up. Then BTC has a mega move (before it makes an ATH ) which comes after it is already up a few Xs from its previous ATH . The entire world talks about it, everyone is getting in… including altcoin holders who capitulate and sell their Alts for BTC . That final wick down for alts is followed by a sharp bounce and there is 1-2 month alt season. Essentially this is like stage number two but on steroids and lasts less as too much ‘stupid’ money is flowing into the market and there isn’t enough liquidity to sustain those valuations. Like with stage two, the ones that go up first are mostly large caps, then mid caps and finally small caps however this doesn’t mean that some mid-small caps don’t pump as well. In stage one there isn’t enough liquidity to pump large caps, but in the other two there is.

To sum this all up, this market is all about momentum. People make money in Bitcoin or hear about Bitcoin doing well, and they get down the rabbit hole. Bitcoin is the centre as most people have heard about it and not any of the other obscure altcoins. Once greed kicks in and everyone is chasing the hottest alts at the time. The essence of the ‘momentum’ or the ‘spark’ behind all this is that people make money on Bitcoin or they hear others make money and then try to find the next Bitcoin even though there isn’t one. So when you see that the music has stopped for a specific altcoin don’t try to play every bounce as the trend is against you. First check if the music has stopped for all alts and wait by holding BTC & fiat, and if it hasn’t stopped try to find the next altcoin that could pump if it hasn’t.

Finally I’d like to share my final thoughts on where we are now and what is coming next. In my opinion it will soon be all about Bitcoin , which will rally to 20k within the next 3-6 months and alts trend down against it. I can see altcoins having many spectacular bounces along the way, yet Bitcoin will be the main show. However until we get to the point that Bitcoin starts rallying, I do see some potential pain with a potential dip to at least 9.2k and maybe even down to 7.3-7.8k. There are several technical/quantitative reasons that make me think this is possible based on Bitcoin data, yet these aren’t the primary reason. At the moment I can still see stocks & metals going down 5-15% as the USD goes up 2-3% before it rolls over, which would most likely drag crypto down as well. Maybe its the deflationary pressures from covid and lack of stimulus. Maybe it is the election uncertainty. Maybe markets just chop and slowly bleed for a bit as they had gone up too much too fast. As for altcoins until I see Ethereum close above 400 I am not really willing to take big bets on them. Yes altcoins have beautiful fundamentals and a lot of things going for them, though if Bitcoin dips hard and then starts rallying like crazy… it will suck all the liquidity and they will suffer short term. Everything regarding Bitcoin and especially on chain data is extremely bullish and of course altcoins will start shining again over the next 3-6 months, so all I am saying is that being more cautious and patient in the short-medium term could be the best strategy.



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