What a week it has been. I don’t think many of us expected such a hard hit to come so quickly, and even with the bounce from $6k, are we really out of the woods yet? I have been Tweeting out some stuff this week, specifically taking an honest look at the weaknesses in my trading strategy, but I want to put it all down more clearly here.
When I first started taking Crypto investment seriously, I operated with a strict set of rules around my trading, but after such a strong end to the year I got complacent, I drank the Kool-Aid, and it’s walloped my portfolio. By not exercising strict controls around protecting capital, I have lost all the gains from the end of November through to the start of January, where my portfolio doubled. Grrrr.
I am going to address both the market as a whole first and then let you know what I will be doing next personally.
Bear Market?
Are we in a Bear Market? Are we in a Bear Market? ARE WE IN A FUCKING BEAR MARKET PETE?
It is a hard question to answer as we have only ever had one Crypto bear market before and the market conditions were very different. It is also tough to compare the Crypto market to other markets because the swings are much higher and the cycles are much faster.
Investopedia classes a Bear Market as:
“A downturn of 20% or more from a peak in multiple broad market indexes, such as the Dow Jones Industrial Average (DJIA) or Standard & Poor’s 500 Index (S&P 500), over a two-month period.”
Essentially it is a significant downturn over a prolonged period. If it is not a prolonged period, then this is classed as a “correction”. In the Crypto world where standard rules don’t apply, it could be argued that we need to double the drop to 40% and half the time span to a just one-month to make it more comparable to the traditional markets. In which case, yes, we’re very close to a bear market. And on average, a bear market lasts at least 15 months — so even if you half that, we might still be in a world of pain for the majority of 2018. While this happened in 2014, it just doesn’t feel like Crypto is going to have another few months of this.
However, I wonder whether we should even be talking in “markets” in the fast-moving Crypto world, perhaps we should be thinking in Bull and Bear “cycles”.
As I stated, the critical difference between a “market” and a “correction” is time. A correction comes quickly and sees a rapid decline. A bull market is a slow, gradual downturn. After a fast or parabolic rise (as we saw at the end of last year), it is very natural to fall back into its more regular, sensible and stable growth line. So I would suggest we are in simply a correction rather than the start of a Bear market.
Disclaimer: I could be wrong :)
A correction had to come at some point. Seeing 2,000% growth in a 10-month period, meant that many investors did (quite sensibly) start profit taking. That, combined with regulatory uncertainty, FUD (Fear, Uncertainty, Doubt), and market manipulation will, of course, lead to a retrace back to a more sensible line of growth.
You can see with the chart below, that during 2017, the price of Bitcoin stayed within a consistent channel, and while there was significant growth, it was tracking within this channel. It was only towards the end of November when the price made a parabolic move that things went a little crazy, moving from a close of $8,191 on the 24th Nov to a peak of $19,550 on the 16th of December. A rise of 144% in 22 days.
You can see the breakout on the chart which I have highlighted with a blue circle. You can also see with the RSI, the yellow circle, that Bitcoin has entered overbought territory.
So what drove this price growth? It s most likely down to the introduction of CME futures, which, according to the head of CME Group, Terry Duffy, will reduce Bitcoin price volatility. Wrong there then. News of futures trading was seen as a highly bullish market signal, this validation for Bitcoin within traditional markets would trigger a wave of derivatives would allow Wall Street and institutional investors to join the Bitcoin train. The reality was very different though, the amount of Bitcoin traded in these futures contracts was very low compared to Crypto exchanges.
Interestingly I found the following chart, shared by @beetcoin quite telling. The old saying, “Buy the rumour, sell the news.”
CME futures appear to have triggered a mini speculative bubble when in reality they are nothing but a cash-settled bet on the future price of the asset; an institutional investors Etoro.
If you look back at the chart, you will see that the correction has taken us back into the channel, and while we dipped out of it, we are now back in the same consistent growth pattern from 2017.
Is the bitcoin dream dead?
Nope!
This was just a correction. These retraces have been seen time and time again, across the market and with individual assets. The dream is still firmly alive, we just got a little bit overexcited for a while, and the smart investors will have noticed this and taken profits.
I am still extremely bullish about the market. As I stated in my previous post: Why I am Not Selling Any of my Bitcoin Soon, I believe in the technology — the blockchain isn’t going anywhere. We need global currencies in a globalised economy and being able to transfer money around the world without the time constraints, costs and interference of banks and governments is already proving to be a highly valued use case.
Bitcoin is also being increasingly used as a store of wealth. Don’t forget FIAT and gold also have high volatility rates — it’s just that their cycles aren’t as fast. Remember, the total value (or market cap if you like) of all gold mined is estimated to be between $7.1 and $7.8 trillion. It makes the current $400 billion market cap of the entire Crypto sector look tiny.
Still bullish!
Even more so this week, following the Senate hearing on Cryptocurrencies, which if you haven’t watched, I highly suggest you do. It is quite clear that those within the hearing supported this new asset class and can see the benefits to the US economy. They know that the blockchain is here to stay and they know that America can lead the way like it has with the dot-com boom. The caveat is, they will want to ensure that Crypto operates within the regulatory framework of the SEC. A fair compromise for us investors.
Specifically, CFTC Chairman Giancarlo, came out of the hearing as a new hero in Crypto, saying “We owe it this new generation to respect their enthusiasm about virtual currencies with a thoughtful and balanced response, not a dismissive one.”
If you are in this for the high returns, which pretty much all of us are, then you have to get comfortable with massive price swings. Yes, as I point out previously, FUD, a lack of tight regulation and market manipulation do mean that the volatility of bitcoin is much scarier than elsewhere, but this is part of the reason why we’re in it right? The volatility can lead to significant gains.
Let’s also remind ourselves that the whales are hugely influential in manipulating the price. Simply put, they can force the price down. When the price drops, they will then come back in and sweep up more Bitcoin at a lower price than they sold them for and so on the cycle goes. They are accumulating more bitcoin at the expense of those with the weakest hands.
Bitcoin has been here before
In October 2013 the price of Bitcoin leapt from $127 to a high of $1,162 in mid-December. It took until the start of January 2017 to return to that height. Last year we saw a correction in June that lasted for two months, and then another correction in November before it went parabolic. We are now back down to those November numbers again.
Even with regulation, it will be difficult to control or stop the whales due to the nature of Bitcoin trading on multiple global exchanges. There is no one to limit insider trading, and there is no one to pull the plug on the entire market if it starts to fall too fast, like the People’s Bank of China did in 2015 when the Chinese stock market started crashing.
The market is open to panic and manipulation. With no monetary policy or state-controlled financier to cool down or heat up the markets, it is left to the whales to do the manipulating and the retail investors to do the panicking. However, although Crypto cycles might move faster, the fundamental market structure is similar to most others.
So what should we do now?
- Don’t panic. If you bought Bitcoin any time over the last three months, you are probably looking at a price point lower than your initial investment, and that might cause you to worry. Try not to. If you bought a house, and a month later the market dipped, you wouldn’t be rushing to put it on the market.
You should be in for the long haul (playing with money you can afford to lose) so don’t panic sell as your next entry point might be higher, and you become one of those people that everyone else is making money from. You should be looking long-term, always look long-term, between three and five years, so sit back, crack open a beer, and please don’t bloody panic. - Resist the urge to buy back into the market at every bounce. You could get trapped. What does this mean? You see the charts go green and you think we’ve bottomed out and it’s on its way back up — time to buy the dip. You buy in the green, and next day it goes down further. A few days later its green again — it’s back — buy in? But in fact, there might be further down to go still. You’re getting trapped by the bounce. Only buy in when we have confirmed support, that means multi-day price support and multi-day green candles.
- Look at longer time frames. Yes, Crypto time frames are fast, but they’re not that fast. Anything under 1-hour is hard to assume support. Anything less than a day doesn’t tell you much. We may have a little green right now, but this is on the back of multiple daily red candles, in the last nine days we have had 7.
Personally, I think this is nothing more than a correction from the CME futures speculation, and we are going to settle back into the 2017 channel. We need to be prepared for when this happens again though, we all know that ETFs are getting closer. If they come then you can expect another parabolic move, but be prepared, take money off the table. If you don’t, then you need to be comfortable with any downswing after.
What have I personally learnt?
For me, this is an excellent opportunity to re-evaluate what I have done well and where I have failed.
The good:
- I have remained in full control of my emotions and not made irrational decisions.
- I have not been drawn into FOMO or crazy behaviour. I don’t chase coins.
- I study the fundamentals and the team behind the projects.
- I consider the macro picture to be significant and don’t get too bogged down in the day to day issues.
The bad:
- Technical Analysis is still weak, and as a long-term investor, I need to understand TA indicators, mainly those for entry and exit — support, resistance, SMA (Simple Moving Average) and fibs (Fibonacci levels).
- Capital controls should be improved, this means taking profits on the way up and when the market is frothy.
- Focusing and ensuring I keep to my strategy and am working to a routine.
The ugly:
- Greed: set income targets and ensure I exit when I hit them.
- Risk management positioning on investments, size of portfolio
Now I am working on version 4.0 of my strategy, which will focus on refining those aspects mentioned above. I worked in advertising for 20 years to earn my stripes and it was over confident to think I had become a Crypto expert in 12 months. * The journey continues.
Any questions, then please give me a shout.