Practical | Three technical analysis methods to master the Bitcoin market cycle

Source: OKEx

Compiled by: First.VIP

This article will share three technical analysis methods to analyze the BTC market cycle and finally find the answer: Is now the best time to enter the market?

(First Class Warehouse Note: It is a consensus that BTC "halving" is good news, but when is the best time to buy? As we all know, in the stock market, professional investors often use fundamental analysis and technical analysis to make investment decisions. It turns out that in a "less efficient" capital market, both analysis methods have certain reference value. In a market like cryptocurrency, investors are not completely rational, there are irreconcilable deviations in investors' valuation of assets, and asset prices do not fully reflect available information. It is not an "efficient market" at all. Therefore, technical analysis methods that analyze historical data can better highlight their role. )

The current market expectation that "Bitcoin will bring a bull market" is mainly based on the previous two experiences. As we can see from the figure below, Bitcoin has been halved twice. 367 days after the first halving, the BTC historical high (ATH) was broken, and the market price soared by 9260%. 526 days after the second halving, a new ATH was reached, and the BTC price rose by 2976%.

Therefore, although the increase in Bitcoin market value and the prosperity of the derivatives market have weakened the volatility of Bitcoin compared with the previous two halving cycles, many people still believe that the third halving will inevitably cause the price of Bitcoin to increase by more than 10 times.

Figure 1: Historical fluctuations in Bitcoin prices

This article will use the moving average (MA), Altman model (Z-score) and reserve risk model (Reserve Risk Model) to explore with readers whether there is a best time to buy Bitcoin.

Moving Average (MA)

Moving average (MA) is the average of Bitcoin price trends. This model tends to believe that historical prices have a stronger impact on future trends. MA often has short-term, medium-term, and long-term indicators, which are 5 days/10 days, 30 days/60 days, and 120 days/240 days. This article will use Bitcoin's two-year MA and MA*5 (MA730 and MA730*5, respectively) indicators as analysis tools. The main conclusion to be drawn is: in which periods can buying and selling Bitcoin generate greater profits.

The figure below shows that when the price falls below the MA730 moving average (green line), buying Bitcoin will generate excess returns (i.e. the best time to buy); when the price breaks through the MA730*5 moving average (red line), it means that shorting Bitcoin will generate excess returns (i.e. the best time to sell). With the halving of Bitcoin, there will be obvious market cycle fluctuations: price surges, corrections, and sideways (overexcitement of market participants and over-tightening of prices lead to offsetting results). As can be seen from Figure 2, the first and second green areas occurred about a year and a half before the halving. The same applies, there was also a green area between December 2018 and April 2019, which may have been the best time to buy Bitcoin and enjoy the excess returns brought by the third halving.

Figure 2: Analysis of BTC using the two-year MA and MA*5 indicators

Altman Model (Z-score)

The Altman model (also known as the Z-Score) more accurately points out the peak of the market price. This indicator is more inclined to discover the fair value of Bitcoin through C2C transactions. The calculation formula is as follows:

In the above formula, Market Cap is the current Bitcoin price multiplied by the number of Bitcoins in circulation; Realized Cap refers to the price at which each Bitcoin was last moved (that is, the last time it was sent from one wallet to another), and then it adds up all these individual prices, takes the average, and then multiplies this average price by the total number of Bitcoins in circulation.

Fair value usually represents the price of large OTC transactions. According to BTC.com, as of January 3, 2020, 0.000349% of the top addresses hold 15.14% of Bitcoin. The Bitcoin market is still a highly concentrated market, and to a certain extent, the larger OTC transaction price can better represent the fair price of Bitcoin.

The Z-Score is calculated as the difference between market value and fair value, divided by the standard deviation of the two (i.e. the denominator in the above formula). The Z-Score can be used to identify periods when Bitcoin is too high or too low relative to its "fair value". As can be seen from Figure 3, when the market value of Bitcoin is abnormally higher than the fair value, the Z-Score will enter the red zone, indicating that the top of the current market cycle has been reached. Conversely, when the fair value is abnormally higher than the market value, the Z-Score enters the green zone, indicating that the current market cycle has bottomed out. Currently, a new green zone is forming.

Figure 3: Z-Score model analysis of BTC

Reserve Risk

The Reserve Risk model gives buy/sell recommendations by measuring risk and return. The indicators of this model tend to attribute the value of Bitcoin to long-term holders (HODL), and the risk mainly comes from the destruction of coin days. Coin days = number of Bitcoins * number of days placed in an address. Once this Bitcoin is traded (transferred), coin day destruction occurs.

For example, Alice buys 1 Bitcoin and keeps it in her wallet for 7 days, then sells it. When the Bitcoin is transferred from Alice's wallet to the new buyer's wallet, 7 coin-days are destroyed. The larger the value of coin-day destruction, the smaller the number of long-term Bitcoin holders during this period, and the greater the risk of holding Bitcoin.

The following figure shows the destruction of coins in different holding periods, with the lower holding period being 1 day and 7 days, and the higher holding period being 3 years and 5 years. Here, short-term holding represents demand, and long-term holding represents supply. It can be seen from the figure that each round of Bitcoin price growth is stimulated by new demand for holding coins.

Figure 4: Daily destruction of holders with different periods

We convert the coin-day destruction data into assets held for different periods of time, and the conversion results are shown in the figure below. It can more directly reflect that with each round of coin price growth, the number of coins hoarded is also increasing. Among them, the 1d data can be roughly regarded as the daily on-chain transaction volume.

Figure 5: BTC market value by holders of different tenures

The assets held at different periods are defined as HODL Bank. The holding risk is inversely proportional to HODL Bank and directly proportional to the BTC price. In other words, the more BTC is stored (held), the lower the holding risk, and vice versa. The formula is as follows:

Figure 6 shows that every time the holding risk value enters the red area, it is the market peak. When it enters the green area, it is a good time to buy BTC. Currently, the market in early January 2020 is in the green area.

Figure 6: Holding risk analysis

This article analyzes the current market cycle of Bitcoin through three technical indicators: moving average (MA), Altman model (Z-score) and holding risk. Although the analysis shows that the current time (early January 2020) seems to be another entry opportunity, it is worth noting that the upward trend of Bitcoin prices after halving is being extended every time. For investors who seek to maximize returns, it should be noted that this market cycle is not expected to end until 2022.

This article only represents the views of the original author. First.VIP always remains objective and neutral, presenting diverse information to readers for learning and communication, and does not constitute investment advice.