Investor Economics of Bitcoin

 

Image result for bitcoin wallpaper economics
An original piece by Chaoss ; Hosted by the Zerononcense Brand

 

Economics — Noun — the branch of knowledge concerned with the production, consumption, and transfer of wealth.

Experienced investors and traders may want to scroll to heading “The Cycle” as the first section is an explanation of the phases in the Investor Economic Cycle.

All markets be it, Forex, Stocks, Futures, Index or Cryptocurrencies move in cycles. Some cycles run nicely along with smaller time frames on the 4 & 8 hour charts and more run nicely along with larger time frames like the daily & weekly. These cycles are important to identify as they tell a story of our journey within trading. They inform us of where we are located on this journey and where we may go.

With that, today I am going to take you, the reader, on a journey piggy backing on the investor economic cycle of Bitcoin. Our end goal of this journey is to attempt to identify IF bottom is in or if not, when?

We will start our journey back in July of 2013 but first, I would like to show you what the Economics of an investor looks like.

Investor economics has two global phases which can be broken down. The global phases are Contraction and Expansion. The market is either Contracting — meaning to decrease in size, number or range — or its Expanding — meaning to become larger or more extensive — Figure 1.0 — In layman’s terms, the market is either going up or going down, investors are either buying or selling. Got it?

Figure 1.0

 

Each of those two phases have another two, add-on’s, if you will. These being Peak meaning top and Trough meaning bottom. Both are followed by either contraction or expansion.

Figure 1.1

 

One of the more important factors on these images above is the trend line. In the market, generally, expansion brings market price action back to mean (long term trend line) which is followed by more expansion until it peaks. After peaking, the market contracts to trend line, plowing through it, right to where it finds bottom (trough).

Oddly, with bitcoin, even though it seems to carry this pattern, there has never been what i call an “industry standard” trough (bottom) even though the chart shows clear investor economic standards. Maybe the crypto market is changing everything, literally everything. I will show you what I mean further down.

Delving Deeper

Now that we have a grip of basic economic movement in its simplest form, lets dig a little deeper and breakdown the global phases into sub global phases of which there are 4.

Pure Expansion

Pre-Recession

Recession

Post Recession

Recession

To explain the above in a way for most to understand and connect with, I am going to start with Recession as Bitcoin is just after finishing one or it is still in one. Yup — the scars are fresh. More scars inbound?

Recession in essence is a flippining in supply and demand. Large sell offs (Fig 1.2) increase the supply flow of an asset, in this case Bitcoin, lowering prices as supply begins to out-weigh demand. See explanation of Supply & Demand here.

Fig 1.2

 

In most markets, a recession only lasts a period of approx 13% of entire investor economic cycle. This statistic is based on the stock market from 1961–2015. For bitcoin, this statistic is a little off as from November 2011 to June 2015, recession lasted approx 38% of the cycle.

For most investors, the goal of a recession is to build inventories (bags) at lower prices depending on their investment strategy.

We can compare to a housing crash. The best time to buy a house is during a housing crash as people become desperate selling houses for over 40% less and banks selling houses who’s owners defaulted on their mortgage. You will buy a house who’s value will increase by at least 40% after the housing recession, at discounted prices.

Buying Bitcoin in this zone is relatively the same thing.

Building inventories can cause small but strong price movement even in a recession as see in Fig 1.3. These moves up, peak, which many investors will short to increase their capital even more and they will use that capital to build inventories even more. Its a cycle within a cycle.

Fig 1.3

 

Its just a game & when recession hits, you play the game differently.

The prices will continue to fall with sell offs and supply will continue to exceed demand until bottom at which point the market will run sideways as there is now a balance between supply and demand.

By the end of recession, many investors will have their inventories built, built in areas which many of us would not even think of buying in.

Post-Recession

Post-recession comes directly after recession and is known as a trough (bottom). The market begins to range very tightly as seen in Fig 1.4 — and prices begin to stabilize. (Note: during this phase, there is not much action and i believe everything is rather self explanatory)

Fig 1.4

 

Between these blue lines is the current range of this post-recession phase. As you can see, all previous price action, week on week, has been nowhere near the tightness of this price action.

Inventories are strong during this phase of the market. Inventories are built and this is reflected by the little to no volatile price action as seen during the recession phase.

As this moment of the cycle, bears and bulls are in a state of agreement so to speak. Neither bull nor bear can know which way the market is going to turn. If the market moves up, we will have completed a cycle and move into pure expansion. If the market moves down, we can now mark this Post-recession phase as void and revert back to the recession phase.

This phase is not a good region to buy in if you had not been building your inventory during the recession. Ideally, you are sitting on your hands and should await a breakout in either direction and play accordingly.

Investors who have been building their inventories are now ready for the next bullish phase and have stopped accumulating. Bears have become slow, not weak, as there is no-one to buy from them. (On a grander scale that is. As seen with the price action in Fig 1.2)

Pure-Expansion

Here is where things turn bullish.

Demand begins to take control over supply. Supply is constrained by inventories built. Higher prices are needed to encourage supply, meaning, higher prices are needed to entice those who accumulated to sell and supply others wanting to buy. All this action re-introduces volatility and price bobs along the long term trend line. (fig 1.5 — orange trend line)

Fig 1.5

 

Here, demand outweighs supply rather than supply outweighing demand as seen in the recession phase. Sell offs are less strong and can be seen as small resupplies to buyers.

The pure-expansion phase may also be referred to the Marketing Phase (Google lifts ban on crypto ads?). Slowly but surely we begin to see more retail get involved in the market. As the supply is lower now, the price per bitcoin will increase in value establishing a full bull market.

As this moment, its time to accumulate in preparation for the final phase, pre-recession. That is, if you have not done so in recession.

Pre-Recession

The second last phase of the cycle (Its actually the last but we started this article with recession) is Pre-Recession. That is, when prices accelerate breaking though all time highs and your mother, bother, sister, dad, aunts, uncles and even your granny want to buy bitcoin. This state of the market is absolutely unstable. With little to no supply left to buy from, the prices sky rocket (literally large vertical green candles one after another) providing those who accumulated during recession and the little inventories built during pure-expansion to sell off at over inflated prices providing great percentage returns on investments. Unfortunately, this leaves many people sitting at the peak with inventories which they sell at huge losses during recession.

Pre-recession is rather self explanatory. You have huge inflation. Huge demand (General public and Late Retail). Limited Supply. And those who bought low, selling high.

At this point of the market, its time to peak with a large sell off at one moment (within a week) inducing the last phase (or first rather) the recession, completing the economic cycle.

The Cycle

Now with an understanding of the 4 different phases of the investor economic cycle, we will take a look at a bitcoin chart with two possible outcomes.

Either:

Bottom is in.

Or its not.

In fig 1.6, I have marked out the phases of cycles of which i believe we are in the third cycle.

In the following, we will take a look at the previous cycle and compare it with our current cycle position. Please examine chart.

Fig 1.6

 

The cycle seems evident does it not?

From 2012 to late 2013 saw the two final phases of the cycle — pure expansion & Pre-recession.

From late 2013/early 2014 to late 2017 saw a full cycle of phases. (Recession to pre-recession)

From early 2018 to Sept 2018 saw the first stage of the third cycle and we are now entering phase two, post recession.

The current stage we are in now is a reflection of the post recession phase as seen in April 2015 which followed after a long and slow bear market. Our recent bear market was very sharp and volatile. In 2015, the post recession phase of the market bobbed along for Approx 2 months until volatility re-entered. After the re-entry of volatility, we slowly moved upwards in price establishing and confirming a bull market. It wasn’t until October 2016 the price met long term trend line which price followed closely until March 2017 when it broke away from trend line and accelerated.

In December 2017, we started a new cycle by re-entering recession after peaking and achieving a new ATH. This recession phase has been moving violently for 9 months and we are now met with change in price action, price stabilization, which is the confirmation of a post recession phase.

This stabilization has only been moving for approx 4 weeks. If the past does repeat, I anticipate a further 3–6 weeks of this tight price action which will be followed by re-entry of volatility in either direction (hoping upwards). If price does move upwards, we can confirm that this was indeed post recession phase and was bottom. Otherwise, we drop down, making this post recession redundant and continuing with recession until confirmed otherwise.

With the time scale of a potential move into pure expansion, I would anticipate that bitcoin does not break ATH until early 2020 or late 2019.

BUT.

There is a problem. There is such thing as a industry standard trough (bottom).Generally a trough is a drop below trend line (fig 1.7). Bitcoin has yet to have this in the past 7 years (is crypto really changing everything? Even economic cycles?). When bitcoin had its trough in 2015, it didn’t drop below but was supported by greater volume. Unfortunately, this time, volume is no where near where it was in 2015 in the same phase. We do have 3–6 weeks left of this and it could change but if it doesn’t, I may be hedging a first time drop below trend line (fig 1.8 — blue curve) catching support in the lower 1K region and we will witness a great and final shakeout.

fig 1.7

 

fig 1.8

 

I would like to take this opportunity to thank you for reading the above. If it helped you learning something, I would love to know as the purpose of sharing knowledge is to learn. If you have an idea or think differently, find me on twitter — @cryptochaoss — and lets hash it out!!

Invest safe!.

Chaoss.

Canonical Link: https://medium.com/@cryptochaoss/investor-economics-of-bitcoin-bc603b5d17c4

 

 

 

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