Jan 25, 2022
No Fear in Cryptocurrency
Why I buck the trend.
Good morning, afternoon or evening to my readers/friends out there.
Today, I explore and attempt to explain why I have not experienced any fear during this recent local downturn in the Cryptocurrency markets and I also explain why you shouldn’t fear this either even if you bought any Cryptocurrency at the top of the peak and why you should not sell.
Let me just quickly clarify that this is not “hodl for ever” advice, there is clear evidence to back up my statement as to why selling at this point would be a clear mistake.
First, let’s start by looking at the Cryptocurrency market performance with the Total Crypto Market Cap chart.
As per my normal charting investigations, I will always use a Linear Regression Channel as it tends to yield the best results unless you also use a few other models of which I tend to do via Python but that’s a discussion for another time. Suffice it to say, Linear Regression from TradingView is a very handy tool.
On this chart, I have applied the linear regression channel to a 13 month stretch of time and just extended the channel lines to project the continuation of the trend to the end of the current trading year otherwise the linear progression channel ends at the last available data-point.
So what do we see here?
Well, at first glance, we can see that the Cryptocurrency markets are currently in a localised downtrend reminiscent of the May 2021 downturn but, when you look at last year and the data from this year, you can clearly see a trend of higher highs and higher lows on the main data points which touch the tops and bottoms of the linear regression channel limits. With this in mind, this informs me that a continuation of momentum, despite worldwide events, are likely to continue, however, just because the price action goes up, doesn’t mean it always will and so, we seek further clarification in the form of the Pearson Coefficient for the linear regression channel. This current linear regression channel P-Value is at 0.47
The best way to think about the P-Value is to suggest that it is an indication of the strength of probability that what is happening, will continue to happen and to simply convert the decimal point value to a percentage. In this case, that percentage would be 47%.
At this point, you are thinking “hey wait a minute, the likelihood of a continuation is less than half”. Well, you are right but when dealing with probability, you have to remember that things won’t always reverse just because probability dictates it should. For example, the probability on winning the lottery with a string of numbers such as 1,2,3,4,5,6 would be extremely low but that won’t stop the event from coming to pass at some point in time.
In this case, we’d like to have the P-Value higher than 0.5 but 13 months of data within a two standard deviation range tends to reinforce my presumption that a continuation of trend is most likely until the linear regression model on the chart, has it’s limits sustainably breached.
If you had entered the market space at the peak whereby you bought in when the markets were all green and the market space was worth $3T, you’d probably be extremely worried, anxious, even depressed but let me ask you this, if you have bought in to Crypto back before the May 2021 dip, would you still be worried if you bought more Crypto before the commencement of the current dip?
I wouldn’t be worried, how about you?
So the question becomes, why would I not be worried?
The simple answer to this is that despite the good, the bad and the downright ugly news that comes from Crypto about how people have made millions or lost their life savings, Cryptocurrency has intrinsic value as a technology and is changing the face of finance. Yes there are enterprises that are duds and scams, schemes and pyramids but there are enterprises that hold true intrinsic value and so, if you hold any Crypto asset that has intrinsic unrealised value, you should never have any fear that the value will be realised.
A good example of this is that I hold Binance Coin — BNB, my holdings on this are down 35% during this dip but I won’t sell because Binance is a service provider and gateway to the Cryptocurrency markets which means that it generates an income and this means that it has intrinsic value which is exploitable by us as traders and investors.
The main issue for most newcomers to this market space is how do you determine what has intrinsic value — a topic that I’ll cover in another article.
It’s safe to say that Bitcoin — BTC, has intrinsic value as it is a store of value but why does it hold it’s value? It does so through fulfilment of what I coin “Digital Metalism”.
Just like Gold, Bitcoin is akin to being a digital precious metal that has been subscribed value to it by a population as opposed to a government with that exception currently being El Salvador. Therefore it stands to reason that as more time progresses and adoption by people and nations alike also increases, the price will increase because it is driven by the simple Power Law relationship, scarcity driven by demand and supply.
To end this section off, let me reassure you further. Even if you had bought in at the peak of market performance when the entire market space was at $3T in value, you would need to see a return to $3T by October to December this year in order to break even and when taking in to consideration the linear regression channel, I find it reassuring that it will most likely come to pass.
For this next section, I am going to explore the US500, which is closely linked to technology stocks and I will also take a look at the Dow Jones Industrial Index to see how their performances correlates to current Cryptocurrency market conditions.
Let’s begin with the US500.
You’ll notice that we have a linear regression channel set up over 25 months of data and projecting to the close of 2022.
For the keen eyed observer, you’ll notice that the linear regression channel experienced a data outlier in the form of the March 2020 dip which was caused by the onset of Covid but other than that, the US500 has experienced an exceptionally high degree of linearity by closely sticking to the median of the linear regression channel. You’ll also note that the P-Value is 0.94 which translates to 94% probability factor that the trend will continue despite the 6% chance for the channel to be invalidated. I don’t deny that there is always a chance for the channel to be invalidated, even on a 6% chance because that lottery win on the numbers 1,2,3,4,5,6 still remain possible even if the odds are lower than by calorie burning exercise program.
The current dip on the US500 did see an attempted breakdown of price action to below the lower boundary of the linear regression channel but the action so far this week is showing that it’s likely that we’ll see a return to the median sooner rather than later which will offer the Cryptocurrency markets some needed relief.
I am one of the few that hold the view that the US500 will break a new ATH this year and this, along with the fact that trend continuation is exceptionally likely, reinforces my position on the Cryptocurrency markets.
Next we take a peek at the DJI.
The setup remains the same for the Dow Jones Industrial index as it does for my previous charts, however, you’ll notice that the span of time covers a 49 month period.
Again, the linearity of price action is relatively stable, the P-Value is at 0.83 which is a probability of 83% that the described upward trend will continue.
You’ll see that the price action dipped 25% below the linear regression channel back in March 2020 with the onset of Covid but the price action then snapped back to correlate closely to the median of the linear regression channel.
At present, the price action of the DJI being just below the median does offer the view that there is enough room for a further 10% dip on US markets if price action correlation continues to be stable on the linear regression channel.
At worst, a data outlier could form which would breach the linear regression channel and force a revisit of the previous low which means that the DJI could slip 45% below the linear regression channel. This remains one of the scenarios that could happen but my informed opinion is that a negative 10% move holds the most probability of happening before correcting back closely to the median. Adding this expectation of what may happen to my outlook on Cryptocurrencies, I understand that this could depress the Cryptocurrency markets down to $1T before the bounce but ultimately, there will still be a continuation to exceed the ATH of the market space.
As Blue Oyster Cult once put it “Don’t Fear the Reaper”. The loses that are shown are unrealised unless you sell a position and from my perspective, one should never sell an asset that has intrinsic value whereas selling speculative positions on truly speculative “assets” such as DOGI or SHIB (as the easiest to name) is always a good strategy.
I hope you find this outlook refreshing and informative and a good counterpoint to the prevailing culture of fear that is permeating the market spaces and if you have any questions, feel free to ask. I am always happy to have a chat and help people out where possible.
