The Capitulation Of The Crypto Market In 2018

Bitcoin finally broke below its all-year-low of $5,800.

In my private newsletter, I mentioned that if prices do break below $5,800, we might be seeing an all-time-low for this year, with $4,600 as the next major support region. Currently, the $4,600 region has been broken, and will prove to be a key resistance level if BTC were to recover.

Explanations For The Dip

If you look up mainstream media for explanations of the dip, most would cite the ongoing Bitcoin Cash Hash War as the main reason for the dip (See Forbes, Crypto News Site 1, Crypto News Site 2). They claim that the ongoing war between the two forked BCH (ABC and SV) are spending so much on keeping up their mining hash rates, that they have to sell their BTC holdings to fund this war.

It seems like a sound explanation. Until you consider that if this is true, how do they fund their usual operations? And if they were to ramp up their mining power, what does it mean for the sustainability of mining in the long run?

Of course, the market collapse is probably affected by other reasons, like how the commodities and stock markets are on an overall decline, or that investors have grown weary of the market. This might also signal that the bullish US stock market might just be about to take a break.

Bigger Powers At Play

Technical analysts on the other hand might present a different view.

In fact, if you were to look at the weekly chart of the BTC, it seems almost intuitive that the downward markets would retest the 200EMA (purple line). I am not saying it on a hindsight bias, because many technical people have called out such a downwards spike before it even happened last week.

Chart from, Weekly Chart BTCUSD

Chart from, Weekly Chart BTCUSD

Technicals have already suggested that we might break lower than $5,800, even before the Bitcoin Cash debate started. So does this mean that technical analyses are more accurate?

Firstly, I acknowledge that there is confirmation bias at work when we trade with technicals. However, in my view, technical analysis allows individuals to interpret the charts in whatever ways they deem fit. When I entertain the plausibility that this entire market (and also stocks and Forex) are all manipulated by players, whoever they are, then technical analysis allows us to make a best guess as to how they are attempting to manipulate the market.

Why Manipulation Works

The obvious reason for manipulation is to profit off the market. After all, trading is a zero sum game, and there would be winners to balance out the ones who have lost or are in a losing position.

Now, who benefits the most when BTC prices are at a low?

If you look back a year before the BTC futures market by CBOE and CME were available, there was also a crash in the market. In fact, there were two crashes prior to the announcement. The first being the crash in May–Jun that saw BTC hit $1,800 (from a prior high of $3,000), and the second being the Sep–Oct crash that saw BTC hit $3,000 (from a prior high of $5,000).

One might argue that this is just normal market cycles. Perhaps.

Let us assume that the market was manipulated to present institutions with opportunities for entries. Alternatively, we could deem it as private funds and hedge funds capitalising on the impending news to profit from the price movement.

Likewise, the current BTC crash presents another “opportunity for institutional entries”. For what? I would put my bets on the upcoming crypto trading desks, more futures markets, and the ETFs. Whether or not these crypto-products or derivatives eventually materialise, the news and rumours create movements, and well, we all know what it takes to pump the market up now.

I might be wrong, and technicals might be a hindsight bias thing. “See, the technicals told you so.”

However, I do believe in the potential of cryptocurrencies. I also recognise that there has been a whole lot more development in this space compared to a year ago, and also a whole lot more attention surrounding the space today. If the price of cryptocurrencies do not warrant a premium over a year ago, then what?

So When Is A Good Time To Buy?

Photo adapted from  ActionVance , Unsplash.

Photo adapted from ActionVance, Unsplash.

Everyone wants to catch the bottom, because that would minimise their exposure to risk and absolve them from the emotional pain of a losing position. Ironically, catching the bottom entails the biggest risk, because you might miss it altogether. You might also enter too big an amount without catching a price near the bottom.

The most sane advice would be to dollar-cost average.

The other piece of advice would be that “the best time was yesterday, and the second-best time is now”. This is not always true by the way.

From my personal experience, the bottom of the market has a particular pattern (or price action) – a 20% dip within an hour, followed by an equivalent-sized recovery in the next hour. The exact magnitude of this decline might differ, and it is almost impossible to buy in at the bottom due to the massive amount of orders (unless you submit an order early, and stagger entries across multiple price points).

From the technical standpoint, the $3,600 region is the next major support region, but I usually do not try to catch the absolute bottom. If I do catch the bottom, there is the element of luck at work.

What happens during these phases is that the overall market sentiments are already generally positive, which means a lot of long (buy) positions have accumulated. The rapid and steep downwards spike is meant to trigger these long orders, hit their stop-losses and liquidation levels, and wipe out these positions. Then the market surges back instantly and so quickly, no new long positions would be entered in time. Something I learnt from my trading experience.

Final Reminders

  1. We have room to dip, but we might reverse from any point here. It would be foolish to sell off entirely and miss out on the reversal. At the same time, I would be careful about catching the bottom of the dip. Hence, the simplest solution is to dollar-cost average.

  2. Be skeptical about what the media presents to you. As the agenda setting theory puts it, the media frames their audiences to think in the way they want their audience to. Always look at the bigger picture.

  3. Get my book, Rolling In Crypto, for more nuggets of advice. Some of the topics covered here, like dollar-cost averaging and catching the manipulated 20% dip and recovery, are explained more thoroughly in the book.

Lastly, live long, and prosper.