The Bitcoin Warning
Diupdate
This is a daily chart of Bitcoin with the Ichimoku Cloud indicator.
The Ichimoku Cloud is one of the best indicators for detecting trend reversals. When a candle breaks above the cloud from below, it is often considered a bullish trend reversal on the timeframe analyzed. Similarly, when a candle breaks below the cloud from above, it is often considered a bearish trend reversal on the timeframe analyzed.
The shaded area that constitutes the cloud acts as support when price enters from above and resistance when price enters from below. Finishing above or below the cloud is considered "piercing" the cloud. The most valid piercings occur on strong volume and with strong oscillator momentum.
As you can see in the chart below, each time Bitcoin tried to pierce the cloud, it failed and long upper wicks formed showing that sellers were in control.
The bearish marubozu that occurred on Friday, August 17th confirmed that the Ichimoku Cloud continues to act as resistance. This forced me to take profit and sell the Bitcoin position that I acquired at the June lows.
Now the situation is precarious because Bitcoin's price is trapped under the Ichimoku Cloud and we are heading into a time of the year when Bitcoin typically underperforms. On average, Bitcoin falls about 5% in September. See the chart below.
Source: bitcoinmonthlyreturn.com
Bitcoin is still trading below its log growth curve. So if one believes the log growth curve is valid, then Bitcoin remains very cheap. See below chart of Bitcoin's log growth curve.
I remain generally bullish on Bitcoin over the long term because I do believe that its log growth curve has validity. With this said, during September, I will be keeping a close eye for signs of a bottom forming. How do I know when a bottom is forming? In short, I look for bullish daily candlestick formations that occur while the Stochastic RSI still has momentum down, and after panic and capitulation have completed. This signals to me that buyers are starting to take control again. You can see my thought process in the chart below.
As you can see in the charts, the candlesticks were telling me that strong hands were buying on June 30th (El Salvador announced it was accumulating Bitcoin), and the day before the Fed meeting in July (someone knew something ahead of that meeting).
As you can see below, Bitcoin rallied 20% from trough to peak following its last buy signal.
Now that Bitcoin has broken below the Ichimoku Cloud, how far might it fall?
Well if the June low fails to hold as support, we can look at the Visible Range Volume Profile (VRVP) for an indication of how far Bitcoin could realistically fall until it finds significant support. That level is roughly around $13,000, or 2019 peak levels.
Although I believe that blockchain technology is absolutely the future, the inherent problem for Bitcoin is that it is an intangible virtual asset with no authority that guarantees its value. Therefore, whenever there is fear in the market, it will always sell off dramatically as market participants flee risk. One should therefore never enter a position in Bitcoin or any cryptocurrency without being able to tolerate complete loss.
With that said, here are some "hacks" you can use to extrapolate when the value of Bitcoin may go up.
1. Check the U.S. dollar index (DXY) chart.
In the chart above, I added a correlation indicator to monitor the correlation between Bitcoin and the U.S. dollar index. As you can see, there is a quite negative correlation between Bitcoin and the dollar index on the weekly chart, and it is apparently statistically significant.
In this case, I would want to avoid Bitcoin when the dollar index is showing signs of strength.
You can see in the chart above that when the dollar index started blasting off over the past several days, Bitcoin started tanking. As long as this strong negative correlation exists between the two assets, you can view going long in one asset as effectively shorting the other.
Why does this negative correlation exist mathematically? Well since Bitcoin's value is measured in dollars (BTC/USD) when the dollar strengthens, this has effect of the denominator in the BTC/USD fraction increasing. When the denominator increases in a fraction, the result is a lower number. Thus, Bitcoin's value as measured against the US dollar (BTC/USD) generally drops when the value of the US dollar increases.
With that said, check out this yearly chart of the dollar index...
As the chart above shows, the dollar index appears to actually be breaking out of a yearly bull flag and breaking above the yearly EMA ribbon for the first time ever.
If true, while this may have many other economic consequences, what might this chart say about Bitcoin's value over the years to come?
2. Money Supply
Below is a chart of the U.S. Money Supply (M2SL) within a regression channel. This regression channel shows how much above or below the mean U.S. money supply currently is at.
Looking at the regression channel I would reasonably conclude that the Federal Reserve is trying to bring the money supply back to its mean (the red line in the below chart). The Fed can achieve this in two ways: by actively reducing the money supply until its reaches then mean or by keeping the money supply generally static over a period of time long enough for the mean to reach the current level. Both of these outcomes are generally bad for Bitcoin because no increase in money supply results in a strengthened dollar. As noted above, by strengthening the dollar, the denominator that measures Bitcoin's value is "strengthening", thus resulting in a lower Bitcoin value relative to the dollar. To put it more simply, fewer dollars should be needed to buy a Bitcoin when the dollar strengthens.
The Fed is also increasing interest rates. Interest rate hikes reduce bank-created money because borrowing decreases. (Credit creates the most amount of money in our economy). Therefore, interest rates generally correlate negatively to Bitcoin as well.
With this said, how might the below chart, which shows an explosive rate of change on interest rates, affect Bitcoin's value? This is the quarterly rate of change on the U.S. 2-year treasury yields. (Yes, the rate of change is literally off the chart)
3. This part is a bit dense, but the basic point is that the Federal Reserve also influences the price of Bitcoin via its reverse repurchase agreement operations.
As the chart below shows, the monthly rate of change in the amount of dollars the Fed was pulling out of the economy via reverse repurchase agreements right before Bitcoin crashed in 2021 is so stratospheric that it is pretty much the only thing visible on the chart.
This reflects both the fact that the Fed was vacuuming up extraordinary amounts of cash (trillions) and that the Fed's use of the reverse repurchase agreements in this manner is unprecedented. In essence, the Federal Reserve's use of reverse repurchase agreements was obfuscating the fact that it was tapering its liquidity support for the economy while still adding assets to its balance sheet (WALCL).
The writing was on the wall for Bitcoin and other risk assets that were beneficiaries of the extreme levels of liquidity that characterized monetary easing.
There are many other charts and economic indicators that one can analyze to try to predict where the price of Bitcoin may go. With that said, one thing is absolutely certain: Although blockchain technology will proliferate in the future, Bitcoin and blockchain technology have only existed for a tiny blip in the history of the financial markets. This blip was during the era of limitless quantitative easing. In face of persistent inflation, that era has definitively ended.
The Ichimoku Cloud is one of the best indicators for detecting trend reversals. When a candle breaks above the cloud from below, it is often considered a bullish trend reversal on the timeframe analyzed. Similarly, when a candle breaks below the cloud from above, it is often considered a bearish trend reversal on the timeframe analyzed.
The shaded area that constitutes the cloud acts as support when price enters from above and resistance when price enters from below. Finishing above or below the cloud is considered "piercing" the cloud. The most valid piercings occur on strong volume and with strong oscillator momentum.
As you can see in the chart below, each time Bitcoin tried to pierce the cloud, it failed and long upper wicks formed showing that sellers were in control.
The bearish marubozu that occurred on Friday, August 17th confirmed that the Ichimoku Cloud continues to act as resistance. This forced me to take profit and sell the Bitcoin position that I acquired at the June lows.
Now the situation is precarious because Bitcoin's price is trapped under the Ichimoku Cloud and we are heading into a time of the year when Bitcoin typically underperforms. On average, Bitcoin falls about 5% in September. See the chart below.
Source: bitcoinmonthlyreturn.com
Bitcoin is still trading below its log growth curve. So if one believes the log growth curve is valid, then Bitcoin remains very cheap. See below chart of Bitcoin's log growth curve.
I remain generally bullish on Bitcoin over the long term because I do believe that its log growth curve has validity. With this said, during September, I will be keeping a close eye for signs of a bottom forming. How do I know when a bottom is forming? In short, I look for bullish daily candlestick formations that occur while the Stochastic RSI still has momentum down, and after panic and capitulation have completed. This signals to me that buyers are starting to take control again. You can see my thought process in the chart below.
As you can see in the charts, the candlesticks were telling me that strong hands were buying on June 30th (El Salvador announced it was accumulating Bitcoin), and the day before the Fed meeting in July (someone knew something ahead of that meeting).
As you can see below, Bitcoin rallied 20% from trough to peak following its last buy signal.
Now that Bitcoin has broken below the Ichimoku Cloud, how far might it fall?
Well if the June low fails to hold as support, we can look at the Visible Range Volume Profile (VRVP) for an indication of how far Bitcoin could realistically fall until it finds significant support. That level is roughly around $13,000, or 2019 peak levels.
Although I believe that blockchain technology is absolutely the future, the inherent problem for Bitcoin is that it is an intangible virtual asset with no authority that guarantees its value. Therefore, whenever there is fear in the market, it will always sell off dramatically as market participants flee risk. One should therefore never enter a position in Bitcoin or any cryptocurrency without being able to tolerate complete loss.
With that said, here are some "hacks" you can use to extrapolate when the value of Bitcoin may go up.
1. Check the U.S. dollar index (DXY) chart.
In the chart above, I added a correlation indicator to monitor the correlation between Bitcoin and the U.S. dollar index. As you can see, there is a quite negative correlation between Bitcoin and the dollar index on the weekly chart, and it is apparently statistically significant.
In this case, I would want to avoid Bitcoin when the dollar index is showing signs of strength.
You can see in the chart above that when the dollar index started blasting off over the past several days, Bitcoin started tanking. As long as this strong negative correlation exists between the two assets, you can view going long in one asset as effectively shorting the other.
Why does this negative correlation exist mathematically? Well since Bitcoin's value is measured in dollars (BTC/USD) when the dollar strengthens, this has effect of the denominator in the BTC/USD fraction increasing. When the denominator increases in a fraction, the result is a lower number. Thus, Bitcoin's value as measured against the US dollar (BTC/USD) generally drops when the value of the US dollar increases.
With that said, check out this yearly chart of the dollar index...
As the chart above shows, the dollar index appears to actually be breaking out of a yearly bull flag and breaking above the yearly EMA ribbon for the first time ever.
If true, while this may have many other economic consequences, what might this chart say about Bitcoin's value over the years to come?
2. Money Supply
Below is a chart of the U.S. Money Supply (M2SL) within a regression channel. This regression channel shows how much above or below the mean U.S. money supply currently is at.
Looking at the regression channel I would reasonably conclude that the Federal Reserve is trying to bring the money supply back to its mean (the red line in the below chart). The Fed can achieve this in two ways: by actively reducing the money supply until its reaches then mean or by keeping the money supply generally static over a period of time long enough for the mean to reach the current level. Both of these outcomes are generally bad for Bitcoin because no increase in money supply results in a strengthened dollar. As noted above, by strengthening the dollar, the denominator that measures Bitcoin's value is "strengthening", thus resulting in a lower Bitcoin value relative to the dollar. To put it more simply, fewer dollars should be needed to buy a Bitcoin when the dollar strengthens.
The Fed is also increasing interest rates. Interest rate hikes reduce bank-created money because borrowing decreases. (Credit creates the most amount of money in our economy). Therefore, interest rates generally correlate negatively to Bitcoin as well.
With this said, how might the below chart, which shows an explosive rate of change on interest rates, affect Bitcoin's value? This is the quarterly rate of change on the U.S. 2-year treasury yields. (Yes, the rate of change is literally off the chart)
3. This part is a bit dense, but the basic point is that the Federal Reserve also influences the price of Bitcoin via its reverse repurchase agreement operations.
As the chart below shows, the monthly rate of change in the amount of dollars the Fed was pulling out of the economy via reverse repurchase agreements right before Bitcoin crashed in 2021 is so stratospheric that it is pretty much the only thing visible on the chart.
This reflects both the fact that the Fed was vacuuming up extraordinary amounts of cash (trillions) and that the Fed's use of the reverse repurchase agreements in this manner is unprecedented. In essence, the Federal Reserve's use of reverse repurchase agreements was obfuscating the fact that it was tapering its liquidity support for the economy while still adding assets to its balance sheet (WALCL).
The writing was on the wall for Bitcoin and other risk assets that were beneficiaries of the extreme levels of liquidity that characterized monetary easing.
There are many other charts and economic indicators that one can analyze to try to predict where the price of Bitcoin may go. With that said, one thing is absolutely certain: Although blockchain technology will proliferate in the future, Bitcoin and blockchain technology have only existed for a tiny blip in the history of the financial markets. This blip was during the era of limitless quantitative easing. In face of persistent inflation, that era has definitively ended.
Catatan
Meant to say Friday, August 19th for the date of the bearish marubozuCatatan
It's a month later, and some may be wondering if it's time to buy Bitcoin. The answer is simple: No, not yet. Bitcoin has been straddling a Fibonacci level for months, but all indicators suggest it will likely fall again before going higher. I will post when I believe the absolute bottom has been reached.Catatan
Based on my calculations using data from buybitcoinworldwide.com/stats/, Bitcoin is likely to undergo a rapid Fibonacci retracement (which will be perceived by non-chartists as a "crash") in or right around late October 2022. My calculations indicate that 35 days from today Bitcoin's price will be in free fall.
As always, anything can happen, not financial advice, this is simply an evidence-based prediction using historical data which is not a guarantee of the future.
Catatan
Four months later and Bitcoin's price still remains trapped in a downtrend. So long as the money supply is decreasing, the yield curve is inverted, and the central bank continues to tighten, we should expect the liquidity issues in the cryptocurrency space to persist.
If you plan to hold Bitcoin or Ethereum throughout this period, store the private keys on your own secure hardware wallet and not on an exchange. Be wary of holding stablecoins as they are most likely to de-peg during an acute liquidity crisis.
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