One Giant Leap for Bitcoin...To be Followed by Two Leaps Back? Not Necessarily so.

Dear Readers,

I was set to launch into giving various technical targets for the coming BTC cycle when I received the following question on my Twitter page:

“So if we only get 180K, and give back 80% we’re at 36K, below the recent ATH?

This was in response to the following chart below that I posted, which sought to provide a technical target for a coming manic market. The question was I thought a very pertinent one. The main point of the question, I suspected, was not so much the disappointment of a relatively modest target [which I think many in the space are now coming to settle for], but rather the concern of yet again a massive correction after a relatively modest target. This article will look to answer this particular question as I think many in this space might likewise be concerned with that kind of outcome… given the recent history, where the popular expectation as regards the last cyclical target was not met by many.

I’ll divide the article into two parts. First, the more technical part with a focus on why a correction of the next spike may not be as drastic as an 80% decline; and second, the more strategic part, as to why some wider investing/ trading strategy has to be desirable if diminishing returns are playing out as has been both forecast and corroborated by my model for many a year now.

1] The Technical Targets

The technical target, based on a comparative fib extension, which drew the response, is simple enough and self-explanatory - the projected high being proportionate to the previous in real terms as measured by the ROI on the y axis. More problematic for most is not so much that targeted high, but the correction from that high. If, as the responder mentioned, an 80% year-long correction resulted from that over-heated high of 180K odd, to give a 36K base, wouldn’t that be devastating for hodlers and investors. I agree that it would be… if that were to occur, but then I also don’t think such a low correction will occur going forward due to the following.

First of, keep in mind that using nominal percentage declines on an exponentially moving chart are of limited use [where real and relative ROI values on the log scale are more useful]. That said, percentages are still significant. Notice here the massive difference that 10% makes - the difference between 36K and just above the current price of 54K. This 54K price is in turn just below the previous high… as the correction of that high was just below its previous. Also notice the series of reducing percentage declines. And also notice that the base of the log growth curve comes up to provide macro support, a support that has functioned very well in two previous cycles.

Given the technical outlook here, I think it fair to say that investors and hodlers can have some confidence that price would not correct to that 36K nominal target… that is very low by today’s standards. That said, a potential correction to say 54K odd is something that may perturb the hodler [as opposed to the investor] that have as yet to factor in the possibility, or should I say probability, of diminishing returns. Here I am making a distinction among Bitcoin buyers, that between hodlers and investors, for there are those that have more of a technical outlook on price, and those that have, for want of a better word, a more wishful outlook.

For investors, that have settled for a more pragmatic, rational, and technical approach to price development, and given what looks to be like the reality of diminishing returns going forward [based on something like the LGC], they might well be interested in supplementing their core investment and hold in BTC with a trade on the extreme cyclical volatility that is part and parcel of this market. Besides being a more effective method in which to take profits, this trade also serves to effectively hedge one’s exposure to this whole space.

2] A Strategic Response to Radical Volatility

Here is the ‘problematic’ for the hodler/ investor - Bitcoin goes on a run to reach stratospheric prices only to return to earth again. The price action is like a series of bubbles but not a bubble per se in the aggregate. Time and again we see that the heights are stormed only to be followed on by the most prosaic of corrections. As I wrote a few years back in 'Could Bitcoin be a Bubble?':

"The way forward here I think is to start thinking of Bitcoin as a series of speculative episodes, or mini-bubbles. What strikes the investor on first viewing the chart is not only the pattern-like structure to it, but the way in which the increases [the speculative episodes] heavily correct. Where assets are simply in a bubble, prices are known to keep inflating on the manic episode without solid corrections and until the price becomes unsustainable. Indeed, any proper correction would serve to ‘pop’ the bubble. In Bitcoin instead, as is depicted in the chart below, you see a solid correction after a manic episode, followed on again by a solid correction after a manic episode. One could indeed say you have a series of something that looks like mini-bubbles, but then not bubbles in so far as each episode in the series heavily corrects, where the previous ‘bubble’ is effectively ‘popped’. It is quite something else in the aggregate. Where the speculative excess culminates in a series of punctuated peaks, the corrections serve to provide a baseline of sorts, with this baseline representing a logarithmic growth curve [something that begins with explosive growth but that plateaus over time]."

One way of meeting this ‘problematic’ - the extreme volatility to both sides and diminishing returns - is to trade a portion of your Bitcoin… or indeed all of it. I do not see much of a solution in trading all of it as you could well be shaken out of that long term core investment, which leaves trading some of it. Yet given the rationale for trading some of your Bitcoin is volatility, then wouldn’t it make more sense to trade the even extra volatility to be found in alt/ USD? I think this makes more sense as one could then sit on their core BTC to their heart’s content while looking to realize profits in the extra volatile alts.

Of course this can only be done if you don’t have maximum exposure to BTC… though of course one could still have a solid exposure to it. This frees up some funds for the cyclical alt/ USD, where profits can be taken in a coming manic market without having to sacrifice either all or part of your BTC core position. Here the investor/ trader is managing to not only take profits, but is also hedging against the whole Crypto sphere in doing so - profits should not be recycled in but go toward buying real assets [of course this depends on one’s time preference]. Keep in mind that those trading BTC to buy yet more BTC have not really realized profits until they ‘cash out’ some of that BTC. Also, if some cycle hodlers have in mind some kind of ‘super-cycle’, where a multi-year bear market is feared, they may be tempted to cash out on all their BTC. Once again, a profit taking strategy in the extra volatility of alt/ BTC serves to nip this anxiety in the bud.

The most common criticism or objection to trading alts is that it is too speculative. And this is fair enough on the face of it. But when you factor in a less risky longer-term cyclical trade, then the odds strengthen in the your favour, for the long-term trend can well absorb the daily volatility on the shorter-term time-frame. These alt trades can effectively be thought ‘investments’ given that they are on a relatively high cyclical time-frame. As I wrote in 'The Concept of Alt Investment', :

"By its nature, trading in the Crypto space lends itself to short-term trading. Given the culture of this high time preference, where one’s perceptions can almost get locked into a perma-present state of mind, the longer-term trade, the cyclical trade, must appear as something like an investment. Of course, in traditional markets, investments have a much lower time preference often involving a decade, or decades. But in the Crypto sphere, a longer-term trade involving a few years takes on all the proportions of an investment. For those that are habituated to thinking in terms of short-term trades, this must almost be a paradigm shift."

To finish with an alt/ USD chart to serve as an example for what I’ve in mind as a hedging and profit-taking strategy to complement one’s core hold in BTC. I chose for this exercize OCEAN/ USD as it is also one that I just happened to have bought ealier today based on the technicals… adding to my already hefty porfolio in the alts.

Here I have a longer-term cyclical 10x trade in mind. This could also be considered an ‘investment’ given that in the Crypto space we’re most often habituated to shorter-term time-frames. There is a definite target to be sold at a later date in a manic market. By establishing a few positions in the alts at or near the bottom, one has something to sell in a manic market, and at a better return, than having to sell their core BTC position. It provides the potential luxury of continuing to sit angst free whilst also realizing some profits on the volatility. Perhaps a case of having your cake and eating it too.

Until next time,

Stay, relatively, safe out there,

Dave the Wave.