Bitcoin – The perfect technical market

by Dec 8, 2017Featured, All Articles, Technical Analysis, Education

Disclosure: This is an educational article meant to assist readers in looking at cryptocurrencies in a different way. Full disclosure: I do own Bitcoin…finally.

I am the first to admit that I ignored Bitcoin – and other cryto-currencies – for too long. The first time I really paid any attention was back in October 2017 when Bitcoin just broke $5,000. A few of us were having coffee at the IFTA conference in Milan when the topic came up. The price has more than tripled in the six weeks since. While this was happening, I’ve been sitting on the sidelines learning as much as I can about Bitcoin, the blockchain, and also ICOs (Initial Coin Offer) as a way to fund developments.

It’s a hot topic right now. It seems that I am hearing more and more people talk about it where ever I go. Interestingly, there are two questions that seem to pop-up every time Bitcoin is mentioned: is it a bubble? and what are the fundamentals? Let’s deal with the fundamental question first.

Every tradable security on earth, at least those that I can think of, has an underlying asset. Shares have companies, index futures have a group of shares, commodities are obvious, bonds are based on the credit-worthiness of the companies and governments they were issued by, and even currencies have the GDP and trade balances of the countries they represent.

For all of these there are fundamental factors that we can look at to say XYZ is overvalued or undervalued. Welcome to CFA-101. It’s finding securities that represent growth opportunities be being undervalued. Please don’t be one of those technicians who say “technicals is the only way” – you’re deluding yourself. Trillions of dollars are invested on a fundamental basis. It works for huge investments with long hold times, but I digress – more on that debate another time.

Even in the tulip bulb mania of the 1600s, there was a physical item. With Bitcoin, there is nothing, nada, nix. There is no fundamental basis for the price of the security. So what does this mean? Basically there is no way to say that Bitcoin is overvalued or undervalued. It just is what it is. This means the only way that we can analyse Bitcoin is by using technical analysis. And all the technicians say “whoo hoo”!

Many of you who have read my writings know that I can talk about quantitative statistical strategies and models through to esoteric Gann methods. I smile when I hear people so entrenched in one area or the other and ridicule the other group. The fact is that we need to know how to use the right tool for the right job. If I need to create an equity-based strategy for a diversified portfolio, I’m going quantitative all the way. But if I have a single security that I am trading, then I am using nothing but Gann and subjective analysis. In that scenario, I have the time to really dig in and get to know that security. Some of the best traders I know have massive wall charts printed on the only security that they trade.They know that chart so well, and get to know the patterns associated with it. I may need to dust off the wall-chart mode printer in the Gann edition of Optuma!

This is a simple chart with a Gann Square tool from the lowest low in Jan this year. It’s a simple tool, but I like how often the solid lines provide support and resistance.

He lists 5 stages from his research:

1. Displacement
This is a shock that makes a big change to the way things are. Think of the digital revolution. Some industries are destroyed (bye bye Kodak), and others are created (hello Google). Without a doubt we are seeing a massive displacement in the financial industry right now.

2. Credit Creation
The boom is expanded by money creation, i.e. you can use your capital in the new industry as collateral for more money to invest even more. Anyone in 2006 want to get an equity line to buy more houses?

The next question is whether we are in a bubble or not. I have no doubt at all that we are in a bubble – I just don’t know where exactly in bubble we are yet, so we need to examine some tell tale signs. In the CMT level 3 course we teach James Montier’s chapter on the Anatomy of a Bubble.


3. Euphoria
This is the stage when the speculators are everywhere and every person you meet is telling you about how much money they made. Think of the Internet Bubble. Companies with no experience were getting tens of millions of dollars for not much more than a good idea.

4. Critical Stage / Financial Distress
This is the point where the early adopters decide to cash out. They will never have to work again. Normally this is the founders of a company, but with Bitcoin it’s de-centralized so it’s a bit different. There will have to be a stage where buyers dry up (usually because everyone realizes that the security is overvalued), but with Bitcoin, how do we measure that? Regardless, when this stage happens in other markets, the top is usually put in. Those who are leveraged to their eye-balls will be forced to sell because they cannot meet their obligations without more growth. Their lenders also get nervous and demand part or full repayment. This is Financial Distress!

5. Revulsion
So who was talking about housing or shares as a great investment in 2009? There’s a lesson in there if we look at the charts – but that’s for another time. The fact is that the final stage of a bubble is where the majority are lamenting their losses and gnashing their teeth whenever that investment is mentioned.

So, where are we now? I’ve not heard of any credit creation for Bitcoin. There are no banks willing to give you a fiat loan based on the value of your Bitcoin holdings. The CFTC has approved two futures products on Bitcoin. What that will do is the topic for another post, but we will all be watching very closely.

My take (and this may be as a late, but optimistic holder of Bitcoin) is that we have only just seen the start. Ie, we are still in the displacement phase. Unless there is some massive government intervention (I don’t know how that can be orchestrated in time), it still seems like there is a long way to go.

As a company, we are creating a number of initiatives:

  1. Getting the best data that we can. We currently have XBTUSD in our Foreign Exchange dataset for Bitcoin, and access to other cryptocurrency data (such as Ethereum and Litecoin) from Quandl (see here for instructions). But we also want to get better cross-rates from a number of exchanges, and we’re working on that too.
  2. Examining ways to accept Bitcoin for our products and services. Reducing credit card fees (yay!)
  3. Looking at an Optuma ICO as an alternative to our planned preference share funding for our new dashboards project. Oh BTW, you can see a sample of our new work at the Relative Rotation Graphs online version. It will be a paid service in time, but it is currently free to access while we are testing it. Login at login with demo demo as the username and password.

It’s an exciting time as we are witnessing an incredible financial revolution. Blockchain—the core of Bitcoin—has so many applications including as a register of shares. We’ll be able to trade securities without the need for exchanges! Now. that’s a revolution.

Of course Bitcoin is volatile, you will have to use all your money management rules, but it is something that deserves considerable research as it appears to be changing the financial world.

Share Link
Mathew Verdouw, CMT, CFTe

Mathew Verdouw, CMT, CFTe

CEO / Founder Optuma

As a Computer Systems Engineer, Mathew started Market Analyst (now Optuma) within 18 months of completing his degree. From that point on, Mathew has made it his mission to build the very best software tools available.

Since 1996 Mathew has been learning about all aspects of financial analysis, and in 2014 earned the CMT designation (Chartered Market Technician). In 2015, he was also awarded the CFTe designation. In 2017, Mathew started to teach the required content for the CMT exams at He is the only person in the world who teaches all three levels due to his broad exposure to all forms of financial analysis.

As someone who has dedicated his life to find better ways to analyse financial markets, Mathew is set to drive innovation in this sector for many years to come.

1 Comment

  1. Kalvert Clark

    I like looking at cycles in charts. Using a 5 TD moving average, then calculate a 10 TD ROC of this, then using the Autocorrelation tool in Optuma on this ROC, a 46 TD cycle emerges (and 22-23 counter Cycles emerges). To visualize this as a forecast tool, take the log Price and create a 5 TD moving average and offset this 46 TDs. Also do this on the moving average’s ROC. You will see that the market has, in the past, made turns at the 46 TD mark. approx. 60 CD or a 6th harmonic. This of course is not infallible, but it is Cycle Analysis as Gann recommended in TTTA.


Submit a Comment

Your email address will not be published. Required fields are marked *

Blog Signup

Pin It on Pinterest

Share This