Study: Crypto Mentality Shift - Potential Bull Market Trigger?

BITFINEX:BTCUSD   Bitcoin / U.S. Dollar
Hello and welcome to the revision of my working theory regarding market patterns in cryptocurrencies.

This analysis follows my previous write-up regarding why intra-day traders in cryptomarkets should focus on alt-usd pairs as opposed to BTCUSD , found below:

In this analysis, I focus on the 4-hour timeframe as opposed to the daily timeframe found in the original. This is due to my impression of a change in market mentality, rendered by BTCUSD's most recent upward thrust from 6,750 to 7,350. During this movement, many alt-usd pairs followed BTCUSD , although some lagged in performance. However, in the following days - as BTCUSD consolidated at the 7,300 level following a rejection of the 1.618 Fibonacci level from the previous week's range, many alt-usd pairs retraced the majority of their upward movements that mimicked BTCUSD .

I have been closely watching beta and correlation levels in this scenario, as I believe this is an important signal and should not be discounted by traders in the space.

What we are seeing is a weakening of a long correlation pattern between BTCUSD and alt-usd pairs, with a weakening beta on alts. It was always my belief that this correlation would break, as per the previous study. However, in the current state of the market, we see the correlation break favoring BTCUSD , meaning that BTCUSD is maintaining its new-found value at the expense of alts. Given this developing relationship, a strengthening BTCUSD will attract more alt-traders, while alts will continue to lose strength and therefore value. In addition to this, as the trading volume in BTCUSD has been declining over the majority of the YTD, it is very possible that we will see a large volume breakout on a daily level, which again - will be funded by declining alt coins. Overall, this would give BTCUSD a good push for further uptrend progression.

I believe that BTCUSD has a high possibility of reaching levels between 7,700-7,850 in the near term, but this will be a painful journey for alts, as traders of the previous mindset (high correlations, high betas) will attempt to push alts. I strongly doubt most alts will exceed their local highs, which were developed on BTCUSD's push to 7,350. This is simply because the alt-usd retraces seen during BTCUSD's consolidation are simply too large, which deter the confidence in the alt market. Those who did not take profit on the initial rise will be anxious to get out, keeping the selling pressure on alts strong. See chart below for my BTCUSD targets:

My theory is further reinforced through an analysis of 4-hour betas and correlations on an individual basis between large cap alt-usd pairs on Bitfinex. This collection of low 4-hour betas (SMA-smoothed on a 3-period basis) amongst the entire grouping has not been seen since February/March. If this trend continues, we will begin to see negative betas (negative correlations).

In conclusion, my theory is that a market mentality shift is taking place. Traders are willing to remain bullish in one asset class ( BTCUSD or alts-usd) while the other asset class is declining. In our case, this currently favors BTCUSD . While this shift may be painful in the short term for alt-usd pairs, this is a very bullish sign for the market. This means that people are able to maintain their confidence in cryptocurrency as a whole. Previously I noted high correlation and high beta patterns, that implied that sideline money was coming into alts-usd and BTCUSD simultaneously, as well as exiting both markets simultaneously. This change implies that the money will begin to flow in a cycle, from one asset class to another, allowing the market strength to develop and gradually begin a bullish cycle.

tl;dr: Times are changing - we are potentially entering Timespan D.

Thank you :)

Ironically, the breakout occurred a day after this post. Correlation of the index sitting below 0 on the 4-hour basis, while beta has almost reached -1.

As per my theory, if this pattern starts to develop, we will start to see a higher standard deviation in correlation, where the correlation and beta patterns will begin to mimic "Timespan A". This will potentially kick off a bullish market cycle, as such patterns reinforce confidence in the market, where one asset class (BTCUSD or alts-usd) can deviate away from the other without any significant impact.

If this is the case, we will see cases of BTCUSD and alts rallying together, as well as periods where alts climb on a BTCUSD retrace and periods where BTCUSD climbs on an alt retrace.

Of course, in the current state of the pattern, this is merely speculation, but as the pattern develops, we will be able to evaluate the confirmation.

One thing is for sure - the market trend are changing for the first time in three/six months :D
Following the recent trend pattern, I am under the belief that the correlation deviation has reached a peak. Historically speaking, this appears to be a high resistance point in the correlation's standard deviation.

This implies that correlations should begin to tighten over the near future, meaning that alt-USD pairs will regain their correlations to BTCUSD. If BTCUSD breaks down below the 7,300 level, alt-USD pairs will most likely accompany the downward movement. Similarly, if Bitcoin's recent trading range holds, alt-USD pairs should exhibit a recovery. There is always a possibility of further growth in negative correlations, but it appears unlikely as the move is unprecedented.

Furthermore, the 4-hour beta measures between the grouping has reached its highest levels of 2018. A reversal in this pattern should be seen in the coming days as the market normalizes.

Comment: As anticipated, correlation normalization has been taking place, as shown on the chart below. Over this period, I am expecting correlations to tighten as BTCUSD begins a retrace.

This can also be examined over the beta chart on major alt-USD pairs, as shown below.

In my opinion, alts will continue to suffer over the coming period. They appear to exhibit a pattern of positive correlations on BTCUSD's bounces and retracements, while holding a negative correlation to BTCUSD stability and rallies.

In the event that BTCUSD continues to push further (beyond high resistance point of 7,860), alts are likely to continue to show weakness, which will most likely be shown in negative correlation and negative beta patterns.

Either way, the current situation is that alt traders are attempting to match alts to BTCUSD performance, but are far and few which makes for weak momentum and low support. Alt retracements should continue to add to the bullish money flow to BTCUSD, which will soften the BTCUSD retracements and provide more stability in its price.

The best and only time to buy alts should be on BTCUSD retracement bottoms, as the initial recovery on BTCUSD will bring alt-usd pairs with it. In effect, this would be nothing more than an alt until we see alts gain more strength.


Good eyes you have @checkm8
checkm8 TheRichest
Thank you :) Going to be interesting to follow these metrics over time, gives a nice sense of market mentality.
incredible my friend

i wish i listened to your advice --

im now 22 percent down on my alt portfolio -- i was about to transfer out :/

im on fence if i should hold drop longer or just jump over to BTC dominance / usd


respect to you
checkm8 invisiblefriend
@invisiblefriend, Thanks for the kind words.

This is a messy situation to be in though, alts are still trending further into negative beta territory, implying negative correlations. In the most ideal scenario, alt-usd pairs would have to maintain a negative correlation to BTCUSD, meaning that they would need to recover on a BTCUSD decline. From the looks of it, currently alts are maintaining negative correlations on BTCUSD stability, while showing positive correlation on BTCUSD declines. This should eventually correct into either: 1) positive correlation patterns or 2) consistent negative correlations until the market stabilizes on both sides of the equation.

That being said, even if this begins to play out, the market could well experience a downturn at first. Similarly, this could play out to be a one-off (statistical outlier).

Not much to say other than that. Even if my theory is validated, this sort of pattern will take time to seep across the market, until we start seeing a more consistent correlation trend. This is the largest occurrence of such behaviors in 2018 and arguably the first of the upcoming trend, so the transition will be difficult.

I'll refrain from giving investment advice, but I hope everything works out to be in your favor :)
awesome TA
checkm8 Rexcell
Thank you :)