The Bitcoin vs. Gold comparison you've seen before but forgot
I'm not the original person to notice the parallels between the monthly chart of Gold and the weekly chart of Bitcoin, but the current conditions of the market warrant a revisit of the comparison. What the comparison ultimately shows, to me, is the acceleration of human perception of Bitcoin, relative to Gold, based on price action - and the inevitable period of time in which Bitcoin is seen in equal light as Gold. The purpose of the article here is to build a less emotional case for the price predictions/levels being thrown around for Bitcoin, seeming to indicate a general haste to figure out how this low volatility period will end. Using the Gold chart as an anchoring point for human behavior, it's important to keep in mind high emotion price predictions ($1000 or $100,000) are not going to happen overnight... leaving a lot of meat on the bone for traders to chew on in the interim. Obviously this long note is a reflection of my current thoughts on the cryptocurrency market, currently consolidating, with the overall trends being more important than the day-to-day swings.
Perspective - Why compare these charts and why the difference in period?
Some may balk at a comparison of two very different time periods (monthly for Gold and weekly for Bitcoin) and consider conclusions drawn from the comparison tenuous at best. Human behavior is the fundamental basis for technical analysis, so how can we conceptualize how behavior over a monthly chart be equivalent to behavior over a weekly chart? Consider the following:
(1) Innate differences in the market participants of Gold and Bitcoin. Note one big difference between these markets and a shortcoming of this comparison is that Gold is an asset traded/held by central banks and large financial institutions around the world. That said, consider the following. For Bitcoin, over the period shown from 2016-now, the exponential advance was fueled by FOMO that was mediated through a high-throughput conduit - the Internet. Trending articles, social networks, and media outlets quickly spread the message that Bitcoin was going to the moon. For Gold, over the period shown from ~2002-now, the exponential advance was fueled by arguably risk-off behavior proximal to the dot-com bubble and likely further fueled by the '08 financial crisis. Consider the general differences in the composition of participants. For Bitcoin, it was likely composed of both tech-savvy and get rich quick mindsets, operating on the rapid dispersion of information over the internet; for Gold, it was likely longer-term focused investors, hedgers, gold bugs, and/or central banks around the world, whose outlooks are based on monthly/yearly trends. For this comparison note - human behavior is the same, but the time horizon of both participants is different.
(2) Innate differences in the market structure. The maturity of the Gold market and millennia of trading provide participants innumerable ways to invest within the market. Bitcoin, on the other hand, is still a developing market with limited ways for global participation, leading to transient inefficiencies (recall the many potential arbitrage opportunities of 2017). HOWEVER, and this is a big one, consider the average person's ability to purchase the real underlying asset of Gold or Bitcoin, keeping in mind the differences in market participants outlined in (1) above. If we consider the average individual, purchasing Bitcoin (via exchange or otherwise) has a more direct impact on the underlying asset price than purchasing Gold (often via jewelry or coins). This is for many reasons, including (a) liquidity and (b) inelastic supply of Bitcoin - while supply may increase as a result of Hodlers selling, there is a discrete supply that is stable from Bitcoin mining, compared with Gold, whose supply is more elastic as Gold miners adjust output to meet demand. Given the more direct effect on price movement for Bitcoin, the quicker the emotional cycles will likely follow.
(3) Liquidity. I think everyone can agree that the liquidity in Bitcoin is very low, in part because of: (a) the low-time preference of Hodlers, (b) country-specific legality of public exchanges/Bitcoin, and (c) low global adoption (relative to other global asset markets). Low liquidity is a perfect environment for high volatility, likely resulting in cycles that occur quicker on average.
(4) Similarity between Gold and Bitcoin. I don't think it's worth belaboring the point that Bitcoin is the digital store of value equivalent of Gold, with further improvements (and some caveats). That is half the reason for the comparison here, with the other half being the similarity in price action between the two assets, albeit on different time frames.
So hopefully this quells some of the arguments against the rational comparison of two very distinct time periods occurring over very distinct economic and global conditions, when trying to compare the effect of human behavior on price between Gold and Bitcoin.
Key Chart Comparisons in Price levels
Price Level Labeling
I started labeling the levels for comparison "1" based on the first level from which an obvious resistance levels was created, broke, and re-tested before continued advance. Some may argue that the nature of price action at level "1" on the Gold chart more resembles the level "2" on the Bitcoin chart - I would agree from this standpoint to some extent, but feel more strongly about a defined resistance level that is made, broke, and supported (~1000 for Gold and ~3000 for Bitcoin).
Level 2 is a very important level that was established as a local low for Gold in December 2015 and on the comparative Bitcoin chart is at ~4950, which is a level I anticipate to be hit sometime over the next month. Note this level was an important top last Summer that was never tested as support, similar to Gold (2008-2010). This is the level from which I would look to long for a trade to level 3.
Level 3 for Gold represents a long-period of price history around which consolidation occurred from 2013-2015. Interestingly, this level held in June and December 2013 before a semi-breakdown in late 2014, followed by a strong swing up in early 2015 testing the log advance line, before continual drop to level 2. For Bitcoin, we can see similar price action, with support at ~6500 for close to a year now, testing twice in February and April of 2018, followed by a strong swing up in July 2018, testing the MA 50 line. We're now entering the boxed green area shown in both charts. For the continued validity of trading from level 3 to 2, we'll need to see continued support at the 5000 level over the next few weeks. This is the only way the fractal comparison of Bitcoin and Gold will hold as shown.
Level 4 will likely be the long-term resistance that will keep Bitcoin under consolidation for longer than some care to consider, around 8500. Note how important this level has been for Gold. Based on the comparison here, I would expect Bitcoin to "catch-up" to Gold and both break level 4 together, marking a period of time in which the concept of Bitcoin is on the same level as a store of value as Gold. From there, I would expect Bitcoin to gain ground and eventually outperform Gold.
When level 5 comes into play for Gold and Bitcoin, I would expect Bitcoin to vastly outperform Gold at this respective level, given the respective time frames spent around the level for each. This is the point at which I anticipate Bitcoin to outperform Gold long-term as a store of value. When articles with titles like "Bitcoin dethrones Gold" and "Bitcoin, the new Gold" will be widespread.
When does this comparison breakdown?
When it does. Who knows? Only time can tell. This is simply my best current understanding of the comparison between these two different, yet strongly linked (i.e., store of value thesis), markets. The near-term comparison outlining the proximal Bitcoin trade from level 2 to 3 can be invalidated by a high volume breakdown from 4950 and weak price action around the log advance line. From there, expect to see 3000s, around which we had a long-term Summer consolidation in Bitcoin last year and around where the MA 200 may be (somewhere 3000-3500). Defending against this breakdown is easy, as outlined in the trading thesis below.
Trading thesis for this outlook
The simple trade idea here is a long from ~4950 (likely requiring spreading your buys across a range, as one can never predict exact levels), from which some profit is taken at ~6500 and then at the declining MA 50 and ~8500 level. This would be a trade for someone looking to swing across multi-week periods. Appropriate position sizing, stops around 4700-4800, and/or hourly/daily price analysis for finding a bottom will be required for good risk/reward metrics. For someone looking to add as part of a longer-term thesis (levels 4, 5 and above), then ~4950 is simply an add level, followed by ~3100-3300. A small allocation, relative to the low probability occurrence of a $1000 Bitcoin, is also relevant, as discussed below. Note also the log advance line also indicates the likely strong support around 5000, so even in the face of volatility, I would be looking fro strong closes above these levels. However, I would expect that over 2019 this log advance line does not hold, as we move away from irrational exuberance to a more mature asset class.
How does this align with other major personalities out their in the Bitcoin trading space?
Tone Vays has discussed his price level around 4950s, 3000s, and 1300s at length, roughly aligning with the perspective laid out here, though differing of course on trading strategy and thought process involved. 4950 will be hit for sure and likely a resolution at 3000, before his descending triangle idea trade wraps up. Just trying to summarize his points here, not state them word for word - see his many live streams if you want more information, similar to everyone below.
Tyler Jenks, of Hyperwave reputation, has a strong belief that if we don't hold ~6000 by the end of the day today (weekly chart), we're definitely headed to the 1000s (while acknowledging we can go much higher for an unknown period of time before an inevitable move to 1000s or lower, based on his hyperwave strategy. While I'm not a big follower of the Hyperwave strategy, I fully appreciate his strategy and the probabilities implied by the strategy (100% according to the theory). However, I have never seen or heard of a trading strategy that is 100% accurate. For this reason alone, I would generally discount the idea and simply hedge against this event by allocating a small portion of my total exposure to Bitcoin as cash, to be used for purchasing around 1000 if this actually played out - the proportion of which is sized according to my personal risk tolerance and store of value thesis for Bitcoin.
Mike Novogratz, having been heavily publicized over the past year, recently put a cap of ~9000 on Bitcoin by year end 2018. This level would be roughly inline with the general trading strategy and comparison to Gold outlined in this post. Tom Lee maintains a ~15000 prediction by 2018 year's end, which seems very unlikely at this point bar some extremely strong fundamental development.
There are many talented traders and investors in this space, so these handful of names are merely a sampling of some of the more widely publicized personalities to give some context to the price levels mentioned here. It's become apparent that even the best of them are subject to their emotional swings endemic to trading and investing alike. The best path forward is appreciating the whole of the market from bear to bull and defining a sound strategy that is yours alone.
General Outlook and Risk Aversion
Overall, if the comparison holds, expect to see near-term buying opportunities relative to the levels discussed above, followed by strength and consolidation around the MA 50, for an unknown period of time, as the Gold comparison eventually ends. I would at this point consider ~4950 to be the local floor. In order to remain open to every future possibility, though, I would be position sized/have stop losses to allow for a possible ~3000 test and less likely ~1000 test. If I was pressed to put arbitrary probabilities on these floor levels being hit before a resumption of trading in step with the Gold comparison, I would say it's 80%, 19%, and 1% for each of the three levels ~4950, ~3000, and ~1000, respectively. Why? Again, the reference point here is principally the comparison of the Bitcoin weekly chart with the Gold monthly chart.
Finally, "risk aversion"... consider a future in which Bitcoin goes to 0. Hold your pitchforks and don't light the pyres yet... it is indeed one potential future among infinite others. But when it comes to your financial stability, cannot be made a 0% probability. Perhaps a tail risk, perhaps an inevitability, depending on your personal disposition. Either way, it's important to consider that reality and why a 100% (or 0%) allocation to Bitcoin is foolhardy. This articles is not financial advice for you to directly act on but merely one trader's thoughts and context for a developing market. One potential future. Only you can know your personal financial status and must plan responsibly if you wish to have any net positive return.
Perspective - Why compare these charts and why the difference in period?
Some may balk at a comparison of two very different time periods (monthly for Gold and weekly for Bitcoin) and consider conclusions drawn from the comparison tenuous at best. Human behavior is the fundamental basis for technical analysis, so how can we conceptualize how behavior over a monthly chart be equivalent to behavior over a weekly chart? Consider the following:
(1) Innate differences in the market participants of Gold and Bitcoin. Note one big difference between these markets and a shortcoming of this comparison is that Gold is an asset traded/held by central banks and large financial institutions around the world. That said, consider the following. For Bitcoin, over the period shown from 2016-now, the exponential advance was fueled by FOMO that was mediated through a high-throughput conduit - the Internet. Trending articles, social networks, and media outlets quickly spread the message that Bitcoin was going to the moon. For Gold, over the period shown from ~2002-now, the exponential advance was fueled by arguably risk-off behavior proximal to the dot-com bubble and likely further fueled by the '08 financial crisis. Consider the general differences in the composition of participants. For Bitcoin, it was likely composed of both tech-savvy and get rich quick mindsets, operating on the rapid dispersion of information over the internet; for Gold, it was likely longer-term focused investors, hedgers, gold bugs, and/or central banks around the world, whose outlooks are based on monthly/yearly trends. For this comparison note - human behavior is the same, but the time horizon of both participants is different.
(2) Innate differences in the market structure. The maturity of the Gold market and millennia of trading provide participants innumerable ways to invest within the market. Bitcoin, on the other hand, is still a developing market with limited ways for global participation, leading to transient inefficiencies (recall the many potential arbitrage opportunities of 2017). HOWEVER, and this is a big one, consider the average person's ability to purchase the real underlying asset of Gold or Bitcoin, keeping in mind the differences in market participants outlined in (1) above. If we consider the average individual, purchasing Bitcoin (via exchange or otherwise) has a more direct impact on the underlying asset price than purchasing Gold (often via jewelry or coins). This is for many reasons, including (a) liquidity and (b) inelastic supply of Bitcoin - while supply may increase as a result of Hodlers selling, there is a discrete supply that is stable from Bitcoin mining, compared with Gold, whose supply is more elastic as Gold miners adjust output to meet demand. Given the more direct effect on price movement for Bitcoin, the quicker the emotional cycles will likely follow.
(3) Liquidity. I think everyone can agree that the liquidity in Bitcoin is very low, in part because of: (a) the low-time preference of Hodlers, (b) country-specific legality of public exchanges/Bitcoin, and (c) low global adoption (relative to other global asset markets). Low liquidity is a perfect environment for high volatility, likely resulting in cycles that occur quicker on average.
(4) Similarity between Gold and Bitcoin. I don't think it's worth belaboring the point that Bitcoin is the digital store of value equivalent of Gold, with further improvements (and some caveats). That is half the reason for the comparison here, with the other half being the similarity in price action between the two assets, albeit on different time frames.
So hopefully this quells some of the arguments against the rational comparison of two very distinct time periods occurring over very distinct economic and global conditions, when trying to compare the effect of human behavior on price between Gold and Bitcoin.
Key Chart Comparisons in Price levels
Price Level Labeling
I started labeling the levels for comparison "1" based on the first level from which an obvious resistance levels was created, broke, and re-tested before continued advance. Some may argue that the nature of price action at level "1" on the Gold chart more resembles the level "2" on the Bitcoin chart - I would agree from this standpoint to some extent, but feel more strongly about a defined resistance level that is made, broke, and supported (~1000 for Gold and ~3000 for Bitcoin).
Level 2 is a very important level that was established as a local low for Gold in December 2015 and on the comparative Bitcoin chart is at ~4950, which is a level I anticipate to be hit sometime over the next month. Note this level was an important top last Summer that was never tested as support, similar to Gold (2008-2010). This is the level from which I would look to long for a trade to level 3.
Level 3 for Gold represents a long-period of price history around which consolidation occurred from 2013-2015. Interestingly, this level held in June and December 2013 before a semi-breakdown in late 2014, followed by a strong swing up in early 2015 testing the log advance line, before continual drop to level 2. For Bitcoin, we can see similar price action, with support at ~6500 for close to a year now, testing twice in February and April of 2018, followed by a strong swing up in July 2018, testing the MA 50 line. We're now entering the boxed green area shown in both charts. For the continued validity of trading from level 3 to 2, we'll need to see continued support at the 5000 level over the next few weeks. This is the only way the fractal comparison of Bitcoin and Gold will hold as shown.
Level 4 will likely be the long-term resistance that will keep Bitcoin under consolidation for longer than some care to consider, around 8500. Note how important this level has been for Gold. Based on the comparison here, I would expect Bitcoin to "catch-up" to Gold and both break level 4 together, marking a period of time in which the concept of Bitcoin is on the same level as a store of value as Gold. From there, I would expect Bitcoin to gain ground and eventually outperform Gold.
When level 5 comes into play for Gold and Bitcoin, I would expect Bitcoin to vastly outperform Gold at this respective level, given the respective time frames spent around the level for each. This is the point at which I anticipate Bitcoin to outperform Gold long-term as a store of value. When articles with titles like "Bitcoin dethrones Gold" and "Bitcoin, the new Gold" will be widespread.
When does this comparison breakdown?
When it does. Who knows? Only time can tell. This is simply my best current understanding of the comparison between these two different, yet strongly linked (i.e., store of value thesis), markets. The near-term comparison outlining the proximal Bitcoin trade from level 2 to 3 can be invalidated by a high volume breakdown from 4950 and weak price action around the log advance line. From there, expect to see 3000s, around which we had a long-term Summer consolidation in Bitcoin last year and around where the MA 200 may be (somewhere 3000-3500). Defending against this breakdown is easy, as outlined in the trading thesis below.
Trading thesis for this outlook
The simple trade idea here is a long from ~4950 (likely requiring spreading your buys across a range, as one can never predict exact levels), from which some profit is taken at ~6500 and then at the declining MA 50 and ~8500 level. This would be a trade for someone looking to swing across multi-week periods. Appropriate position sizing, stops around 4700-4800, and/or hourly/daily price analysis for finding a bottom will be required for good risk/reward metrics. For someone looking to add as part of a longer-term thesis (levels 4, 5 and above), then ~4950 is simply an add level, followed by ~3100-3300. A small allocation, relative to the low probability occurrence of a $1000 Bitcoin, is also relevant, as discussed below. Note also the log advance line also indicates the likely strong support around 5000, so even in the face of volatility, I would be looking fro strong closes above these levels. However, I would expect that over 2019 this log advance line does not hold, as we move away from irrational exuberance to a more mature asset class.
How does this align with other major personalities out their in the Bitcoin trading space?
Tone Vays has discussed his price level around 4950s, 3000s, and 1300s at length, roughly aligning with the perspective laid out here, though differing of course on trading strategy and thought process involved. 4950 will be hit for sure and likely a resolution at 3000, before his descending triangle idea trade wraps up. Just trying to summarize his points here, not state them word for word - see his many live streams if you want more information, similar to everyone below.
Tyler Jenks, of Hyperwave reputation, has a strong belief that if we don't hold ~6000 by the end of the day today (weekly chart), we're definitely headed to the 1000s (while acknowledging we can go much higher for an unknown period of time before an inevitable move to 1000s or lower, based on his hyperwave strategy. While I'm not a big follower of the Hyperwave strategy, I fully appreciate his strategy and the probabilities implied by the strategy (100% according to the theory). However, I have never seen or heard of a trading strategy that is 100% accurate. For this reason alone, I would generally discount the idea and simply hedge against this event by allocating a small portion of my total exposure to Bitcoin as cash, to be used for purchasing around 1000 if this actually played out - the proportion of which is sized according to my personal risk tolerance and store of value thesis for Bitcoin.
Mike Novogratz, having been heavily publicized over the past year, recently put a cap of ~9000 on Bitcoin by year end 2018. This level would be roughly inline with the general trading strategy and comparison to Gold outlined in this post. Tom Lee maintains a ~15000 prediction by 2018 year's end, which seems very unlikely at this point bar some extremely strong fundamental development.
There are many talented traders and investors in this space, so these handful of names are merely a sampling of some of the more widely publicized personalities to give some context to the price levels mentioned here. It's become apparent that even the best of them are subject to their emotional swings endemic to trading and investing alike. The best path forward is appreciating the whole of the market from bear to bull and defining a sound strategy that is yours alone.
General Outlook and Risk Aversion
Overall, if the comparison holds, expect to see near-term buying opportunities relative to the levels discussed above, followed by strength and consolidation around the MA 50, for an unknown period of time, as the Gold comparison eventually ends. I would at this point consider ~4950 to be the local floor. In order to remain open to every future possibility, though, I would be position sized/have stop losses to allow for a possible ~3000 test and less likely ~1000 test. If I was pressed to put arbitrary probabilities on these floor levels being hit before a resumption of trading in step with the Gold comparison, I would say it's 80%, 19%, and 1% for each of the three levels ~4950, ~3000, and ~1000, respectively. Why? Again, the reference point here is principally the comparison of the Bitcoin weekly chart with the Gold monthly chart.
Finally, "risk aversion"... consider a future in which Bitcoin goes to 0. Hold your pitchforks and don't light the pyres yet... it is indeed one potential future among infinite others. But when it comes to your financial stability, cannot be made a 0% probability. Perhaps a tail risk, perhaps an inevitability, depending on your personal disposition. Either way, it's important to consider that reality and why a 100% (or 0%) allocation to Bitcoin is foolhardy. This articles is not financial advice for you to directly act on but merely one trader's thoughts and context for a developing market. One potential future. Only you can know your personal financial status and must plan responsibly if you wish to have any net positive return.
Comment:
Log advance line holding well so far. Looking for the weekly close this coming Sunday to update how well the comparison is holding.
Comment:
11/20 chart:
