Trend is your friend
We will be looking at indicators that can be useful for identifying bottoms in the crypto bear markets, which is helpful for figuring out when to buy and build large crypto positions when prices make it favorable to do so.
Why bear market? Because this is when prices are collapsed 80% or more so far. It does not help you buying at the beginning of the bear market, because we can after crash see 75% down. I do not know if next crash will be like previous, but I know that there will be new bear market, and it is extremely helpful to identify near bottom.
Miners Capitulation
Once we get past the all-time high – the absolute top of the market cycle and then we enter into the bear market. Eventually at some point, when it becomes unprofitable for miners to mine coin, many of them capitulate. Historically, this has marked the bottom of the bear market, and then from there it kick-starts and launches another new fresh bull market.
Why would this happen? If you think about it, miners pretty much represent constant sell pressure on the price of bitcoin because these people are mining and as result receiving the newly minted coins that are entering into circulation first time, and miners want to sell for a profit because they are businessmen.
In the bull market the buying pressure, the buying demand outpaces that selling pressure which leads to higher prices, a bull market, and everyone is happy. As price of bitcoin is rising, the value of mined bitcoins are rising which is increasing selling pressure.
But in the bear market there is huge reduction of buyers, there is more selling pressure than there is buying pressure, and the miners are consistently adding to that, and that lead to lower and lower prices.
The further down that the price go, even less profitable mining becomes, and the lower and lower price go, many more miners have no choice but to capitulate essentially and stop their mining operation. They are turning off their mining machines because average miners simply cannot even break even – the cost to mine the coin becomes either the same or higher than it can be bought for on the market.
And so we get to this point where a great number of the miners capitulate, they stop mining, or they continue but have no choice but to hodl mined coins and wait for better prices. I once read that the secret of successful miner is in his stubbornness to keep mining even if it is not profitable to mine, and then to sell when price skyrockets.
Selling mined cryptocurrency would be the first option because that is most liquid asset miner can sell. Then after they stopped mining, they maybe decide to give up completely and leave the crypto space because they do not really believe it has the future, and then miners sell their mining equipment which is the period when gamers are happy because there are lot of cheap graphic cards on the market.
So all less efficient miners capitulate which means that they stop mining, and before that they are selling more of their mined cryptocurrencies than before because they are worth less (in fiat money) but their expenses fixed in fiat terms, which leads to a great reduction the cryptocurrency price.
This is the closed loop that is causing panic on the crypto markets and people are leaving the crypto space because they see that prices are plummeting, and we get to a point where there’s only the most efficient of miners remaining, and so we’re left with just most efficient miners who are stubborn and are accumulating mined coins rather than sell it, so sell pressure from newly mined coins are significantly reduced and things ease off.
And because they’re the only miners remaining, the amount of competition is reduced which is why we see this reflected in the mining difficulty that adjusts and reduces downwards because of the reduction in mining competition. So we are left with a much lower hash rate for the time being, and much fewer but much more efficient miners because of whom sell pressure is reduced.
Another reason why selling pressure from mining is reduced is because of bitcoin halving, which means that block reward which bitcoin algorithm is releasing is halved for each block. So now organic selling pressure is significantly reduced, and bear market stops when there is no one left to sell, all weak hands are shaken out.
From there we can get that base, that floor of the price of bitcoin, which allows the next bull market to kick off because at that point we reach equilibrium in the market, and once again now we can have situation buying pressure outpace or outweigh a lot of the selling pressure.
That’s why we eventually see this: miners reduce, miners capitulate, which can be measured and seen by falling mining difficulty.
This is all reflected in planB’s chart:
As we can see, the price of bitcoin had its big run in 2016, 2017, then we had the bear market which started in 2018, and by 2019 we had big capitulation in difficulty, as lot of miners capitulated, which signaled the bottom of the bear market at around $3300 price level for bitcoin. Since then, both the price and the difficulty have made a very large surge in price. This makes the case for what planB is trying to argue with data he represents in his tweets.
What this data provides with very high probability, is when the bottom of the bear market is behind us. Always until now, there was big capitulation of miners, which we see by big difficulty drop, after which starts a fresh new bull market.
This is how we can identify when the next bear market will end.
There we have it. When we are attempting to time the market and build a very large position in crypto portfolio, it helps to pay attention to mining difficulty. When we see a big adjustment or shift downwards in mining difficulty, especially in the context of downtrend of prices like we witnessed in 2018, then that is most likely a signal of miner capitulation, which is often coincided with the bottom of the bear market.
P.S. All this is focused on only bitcoin because bitcoin is making more than 50% of the market. If bitcoin’s price stops being relevant to people, then this metric will not do a lot for us as it is doing now.
Intro To Willy Woo
Please just keep on mind that these are tools, don’t live and die by them. Just use the range of these tools to help you with decisions, to make educated guess using a lessons that history taught us. We are looking at bitcoin, because so far, bitcoin is what determines where the whole cryptocurrency space will go. Why is that, see here. In short, some bad inherit from the past. Afterall, bitcoin is making around 50% of the whole cryptocurrency market.
Willy Woo is an on-chain analyst, and what I really like about his work is that he is using on-chain analytics, which is one of the most important tools if these signals have costliness which we can easily check if protocol users have skin in the game for using it.
That can be for example value of transactions, or value of staked amounts. These are very hard metrics to fake, because of how expensive it is to fake these metrics.
Willy Woo has a website https://charts.woobull.com where is a lot going on. I recommend studying everything on this site, but for our purposes we will go to the section called “Bitcoin Valuations” under “Investment Related.”
We can see a whole bunch of different data points here, like market cap which is market price times coin supply, Realised Cap, NVT Caps, Average Caps, and so on.
For our purposes, there are two metrics that will help us identify the bottoms and tops of these big market cycles. This is also great for determining where we are at any point in the market cycle.
We can gauge just these two metrics, so it is not too much work, but these can give us an idea where potentially the bottom or top is or was, or even roughly where we are in the cycle.
How To Know When Is The Beginning Of The Crypto Bull Cycle
To determine bottoms, we can look at data points called Delta Cap, a signal you will find after clicking on “Bitcoin Price Models” which is the Realized Cap minus the Average Cap.
Delta Cap is a tool that historically, was indicating the floor – the market bottoms on the macro scale. This is not for short term movements, which I never recommend, this is a big picture, which we can use to spot market cycle transitions from a bear market to the beginning of bull market.
Here are turned on all sorts of metrics which we will turn off, except Market Cap and Delta Cap. Now we can see how it is almost scary how is Delta Cap well historically coincided with the market bottoms. And if at any point we see the price touching along this Delta Cap line, that could potentially be one of the best possible buy signals which is otherwise impossible to get in the crypto space.
It has been remarkably accurate historically so far, but keep on mind that past performance doesn’t necessarily guarantee future performance.
How To Know When Is The Top Of The Crypto Cull Cycle
On the other side, if we are trying to spot where we can expect market tops, when we are close towards the end of a bull cycle, we can look at the metric called Top Cap which is, the Average Cap multiplied by 35.
Historically, just by coincidence or whatever, who exactly knows what causes all these things, right, typically we have seen a 35 multiplication of the Average Cap to reach the top in whole cycle.
If we look back at crypto 2017 bull market for example, a lot of people wasn’t well aware of what is or who is Willy Woo back then, but I am sure that for everyone who was then in the crypto market, it would be really freaking awesome if they had this chart available to them, because they would not be completely lost in the noisy mess.
Historically, if we would just buy and sell based on these two signals alone, if we would just followed the Delta Signal to determine when to buy, and check when the Top Cap showed us it is time to sell, we would have virtually bought the top and sold the bottom every time!
We would made an absolute fortune, so because of the cast that it is historically aligned up so well, it is beneficial to pay attention on this, even if it is just for fun. Like a hobby, some people like watching fishes in aquarium, and some people like watching charts.
There are no guarantees, there are only probabilities, and if we are the type which likes to feel illusion of control and certainty, check out all the data that is available on this website.
The Logarithmic Regression Chart
A guy who created it first is BitcoinTalk user Trolololo, and a bunch of people have reproduced this model as well later on. When I first saw it, it looked like this:
Ofc I said wtf, no way, this is such a BS! It can’t be that just because some stupid fortune telling charts says so, that Bitcoin will be $10k at the end of 2017!
Price at the end of 2017 was $20k for 1c Bitcoin 😒 Here is how chart looked then
What it is essentially is, a formula that tracks and projects future bitcoin price on a logarithmic scale rather than linear. This means that rather than something going up incrementally throughout the history, there is typically price movements where the price has gone up by an order of magnitude, so big exponential movements, but which are slowing down as time passes.
When we look at this chart, we can see that over time price flattens out on an exponential curve, and that’s because expected rough projection of bitcoin or other cryptocurrencies growth will follow a typical S-curve of adoption where it’s relatively flat in the beginning (although this itself is huge is we are tracking that small scale part from the beginning), and then we have these enormous exponential movements as we capture more and more of the total market, and then eventually when majority has adopted it, it just tapers off and flattens out.
This is provide us really big, macro picture of understanding of where bitcoin is in the total adoption market cycle, so like Willy Woo, we can identify roughly where we are in the market cycle: are we in a period of relative undervaluation or overvaluation (we should not be unreasonable and expect any perfection regarding this!).
Overall, it takes in the entire history of all the bitcoin price movement, and all these understandings and idea of S-curve tech adoptions, to give us just this really big picture outlook that we can look at and reference at any time.
We can access modern version of Logarithmic Regression Projection Chart on a website https://www.moonmath.win/
As we can see, this chart is colored almost like a rainbow.
The lower we go in the green, the blue, generally means that it’s a better time to buy. It signals roughly with the bottom region of market cycles that could be potentially a good buy indicator.
The higher up we go in terms of color, so from the yellow towards orange red and purple, that generally indicates that it’s a better time to sell, because we are around the top region of these big long market cycle movements.
We can typically view these charts for both bitcoin and for the total market cap of all cryptocurrencies. Because cryptocurrency market is tied to bitcoin who is leading the market, there is universal market cycle for all cryptocurrencies.
This is great for giving we a big picture idea of where the prices are in terms of overall market cycles, if, I repeat if, history repeat itself… which is not something we should count on. This is another thing that look like to me like a self-fulfilling prophecy rather than real usage aka adoption is growing.
But whatever the case is, those who understand the history, understand the present… and those who understand the present, and see continuum where we are going, understand the future.
As I said earlier, I was sceptic around this, and it turned out I was right. Lately this model has fallen apart in practice.
Ofc it still has a chance to back on the “right track,” but this is unsustainable imo. Main reason about why it is unsustainable is because bitcoin is not actually growing in value. Price can grow as long as there are greater (or better later) fools, but that has a ceiling. I will not be going on with my pessimism about the bitcoin, you get the point, but what happened is important to address one more point.
That is that Bitcoin shillers will do ANYTHING and EVERYTHING possible to lure you into Bitcoin. So what they did with this chart to “fix it?” They tuned it up a little bit, and ADDED another color! 🤣 And new category as well – 1BTC = 1BTC 🤣
So is this good indicator or not? Well it is better to have it than not to have it. But please take everything with grain of salt.
Mayer Multiple
Mayer multiple is a very simple technical indicator which multiplies the current bitcoin price over the 200 day moving average. The reason people use the Mayer multiple typically is to identify whether or not bitcoin is currently overbought or oversold in the context of longer time frames, which is why we measure the current price against the previous 200-day moving average.
With this metric, we’ll always have a figure or a score, and as a very general rule – the lower this number is, that it represents oversold territory for bitcoin historically; and the higher the figure, the complete opposite… the more overbought the conditions are.
We can use this metric to our advantage is identify either overbought or oversold conditions by comparing the current price to the previous 200 days.
It is also very useful to time accumulating as dollar cost average tactic.
We are talking about the significance of this 2.4 figure which is described on website: “Simulations performed by Trace Mayer determined that in the past, the best long-term result were achieved by accumulating Bitcoin whenever the Mayer Multiple was below 2.4. Since the simulations were based on historical data, they are purely educational and should not be the basis of any financial decision.”
This 2.4 is a very significant figure based on the 10-year price history since bitcoin has existed and since this metric has existed. We can thanks to it make almost like a chart or a table identifying the good and the best times to accumulate bitcoin (and other coins because whole crypto market is correlated to bitcoin) typically by observing or by using this tool.
2.4 or below with the Mayer multiple is okay.
You can have anything less than 1.39 which has been the historical average throughout the entire time of bitcoin with this tool.
1.39 has been the average so anything below that is great because so far with the entire bitcoin price history it’s gone up an awful lot since then, and so 1.39 has been historically average and a very good time to buy.
If you look historically, especially in the bear markets and the capitulation times for bitcoin, anything below 1.0 is typically being a very very good favorable time to buy and to accumulate bitcoin and to build long-term hodl positions.
If you look back at where we were in December 2018, the Mayer multiple around that time was somewhere in the region of about 0.5 to 0.6, so a fair way under the 1.0 which was already considered to be a great time, and as you can see, if you had bought during that $3200 low, when the Mayer multiple signal was indicating that there was a very favorable time to buy, you would have done very very well.
And of course this applies to the opposite way as well. If you look back at the blow off top phase – the peak of the December 2017 bull market, you’d see the Mayer multiple was very high at that time which would have indicated urgent time to sell.
Of course the standard disclaimer apply. This is being just one tool among many, you don’t want to live and die by this, but as you can see historically this indicator is proven to be very useful for identifying overbought territory, oversold territory, and for identifying those times when to accumulate and build those hodl positions by looking at the price right now compared to the price action over the previous 200 days.
The Bitcoin Dominance
I left my favorite for the end. Here is the chart:
As we can see, at the beginning (in 2013) Bitcoin made almost 100% of cryptocurrency market. Over time bitcoin is slowly losing its dominance in the crypto market which is natural and unavoidable because many new cryptocurrencies are appearing every day.
To be honest, I don’t think that Bitcoin should had have after 2017 market cap as high as all other cryptocurrencies together, that does not make lot of sense. Pay attention that this chart does not reflect reality because it takes into account stablecoins which are essentially cryptocurrencies backed by fiat money like $USD (which is btw debatable). For example only Tether at the time of writing this article had 7.31% market share in cryptocurrency market. And there are other stablecoins, which in total make around 10% of all crypto market share.
When we take that into account bitcoin now has around 50% market dominance, which means it is worth as all other cryptocurrencies combined… it is easy conclude that it can only go down from there. But here is the caveat: if it goes down too sharply, that is indicating that we are in the middle of the crypto bubble and crypto bull market.
This happens not because Bitcoin is dropping in price and other cryptos are staying at the same level, but both Bitcoin and other cryptos are growing in price, but other cryptos, since they are much smaller and easier to grow. For example, same $100 million that goes into Bitcoin will barely move its price, but will move significantly cryptocurrency that has less than $1 billion market cap.
In the bull market risk appetite is rising, and money is flowing from big cryptocurrencies toward smaller. Although smaller receive less inflow of capital than Bitcoin, they are rising in higher percentage than Bitcoin.
And the opposite is happening when there is bear market, and then Bitcoin is gaining market dominance.
But overall Bitcoin’s dominance is falling, and it should be falling. Just significant, sharp moves means that there is lots of greed or lots of fear in the markets, which corelates to the crypto bull and bear markets.
Conclusion
The more tools you use as a map and compass to navigate through the market cycles, the higher likelihood is that you will get complete, higher resolution picture of where market is in this current moment, and where it is heading.
That is why I provided you with several indicators. It is entirely possible that one turns out to be inaccurate, but as you use several them at the same time, they overlap like a GPS satellites to provide you most precise location.
If you are relatively new to cryptocurrency space, I advise you to not use any of these tools however, because they can lead you into the dark side of regular trading, which is a trap. You entered the crypto space to reduce stress, not to increase it. You entered the crypto space to free yourself, not to enslave yourself further.
Keep on mind that unimaginable wealth awaits on the other side towards which we are heading, until then you will go through many of these big market cycles.
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nice article Robert