The Nature of Crypto Cycles

The Nature of Crypto Cycles

The Nature of Crypto Cycles

Examining the latest research and news of the crypto world

Adaptive Analysis Newsletter   •   April 19, 2019

Since our last newsletter, a lot has happened in the world of crypto. A treasure hunt for $1 million bitcoin has kicked, Bitcoin Cash SV seems to be spiralling out of control, and research looking into the nature of crypto cycles was published by Binance Reseach. We cover all of this and more.

Key Takeaways:

  • Bitmex partners with Trading Technologies in a move which looks to surely strengthen their position as the dominant crypto derivatives exchange
  • High levels of correlation between bitcoin and altcoins have signalled twelve of the last thirteen market trend reversals
  • Increases in bitcoin price are statistically tied with increases in Google searches for “Buy Bitcoin” one week into the future.

Quick Bits (and Bitcoins)

The Search for Satoshis

In an amazing demonstration of the bravado which bitcoin inspires, a global treasure hunt for $1,000,000 worth of bitcoin has been taking place. 400 shards of a private key need to be assembled to access the bitcoin. Regular clues are being released from the Satoshi’s Treasure website with teams forming and strategising worldwide to secure these shards.

Exchanges Delist BSV amid Significant Miner Losses

The award for the greatest amount of commotion being caused in the recent past of the crypto world goes jointly to Bitcoin Cash SV, Craig Wright, and Calvin Ayre. It seems impossible to take a leisurely scroll through Twitter without being flooded by tweets about Wright not being (or being) Satoshi. The prospects for Bitcoin Cash SV were dim to start with but now seem to be on a downward spiral amid $2.1 million in losses to miners and mass exchange delistings.

Big Partnership for Bitmex

Bitmex has partnered with Trading Technologies, a firm that provides infrastructure for professional traders to speculate in spot and derivative markets. The partnership will provide users of Trading Technologies with access to the perpetual swap derivative products offered by Bitmex. The partnership holds the potentially to significantly increase the already large trading volume taking place on Bitmex. With Bitmex also planning on launching options products, its position of dominance as the leading crypto derivatives exchange looks likely to only strengthen.

Interesting Insights 🤔

Binance delves into the nature of crypto cycles

Binance Research has published another great research piece delving into the nature of cryptocurrency market cycles. Binance has already demonstrated in a recent study the high levels of correlation among top cryptocurrencies.

We summarised all of the juicy details on that research here. This study takes it a level further.

Some of the key findings of the study:

  • Periods where the correlation between bitcoin and altcoins (excluding stablecoins) reached a value of over 0.8 had a high tendency to signal the end of a market trend
  • Approximately 14% of the reported market value of cryptocurrencies is held by institutions.
  • Turnover is high in times of price increases but the realized cap (market cap calculated as the summation of UTXO’s multiplied by their market price at the time) indicates a tendency for crypto investors to HODL in times of downturns

A lot of interesting stuff there. Let’s break it down a bit further.

High correlations may be a powerful market indicator

The study looked at all the times since August 2013 that the correlation between the 60-day average market cap of Bitcoin and the average 90-day USD returns of altcoins (excluding stablecoins went above 0.8). Twelve of the thirteen times that this happened have signalled the end of the current market trend.

The only time this was not the case was a recent ten-day stint that ended on the 30th of September 2018 where markets continued to decrease after the correlation dropped back below 0.8.

The most recent move above 0.8 is still ongoing and has been for over 90 days. The rise above 0.8 on this occasion has resulted in a reversal in price action.

While there is not enough data points for this to be a statistically significant indicator, it could be a powerful one to take into consideration when gauging whether a market trend is approaching a reversal point.

Institutions represent a small portion of the crypto market

Institutions represent a small portion of the crypto market, especially when compared to regions such as the USA and UK where institutions hold a dominant amount of market value. The high proportion of retail investors may be associated with the high turnover rates seen in the crypto market.

The above graph indicates that the markets with the highest proportion of retail investors also exhibit the highest turnover. There is evidence to show retail investorsare more subject to traits that can drive high levels of market activity such as overconfidenceherding, and pessimism.

However, it is also noted that some of the unique properties of the crypto market may be driving higher levels of activity. Factors such as on-chain governance and smart contract activity could be playing a role in the high levels of turnover recorded.

The HODL is strong

The filled-in area of the above chart is the realized market capitalization. This is an interesting measure calculated by multiplying all UTXO’s by their market price at the time.

The line represents the price of bitcoin in USD. What the above chart indicates is that turnover is high in times when the price is increasing but drastically slows down when prices are declining.

The slowdown in turnover during price declines results in their being little impact on the realized market cap given that UTXO’s are still priced at the higher valuations when they were sent. If the turnover remained high when prices were declining, we would see a corresponding decline in the realized cap.

Effectively, this translates to the data backing that investors do HODL in times of market downturns.

How Does “Buy Bitcoin” Google Searches Relate to Bitcoin Price?

The relationship between how Google trends data for bitcoin and the price of bitcoin has been a topic of interest as far back as 2011. How the two relate to one another has always had an air of mystery about it but analyst Qiao Wang (@QWQiao) delved into the data for the past five years to apply some statistical theory to the relationship.

The hope from investors, speculators, and everyone in between is obviously that the information from Google trends can have some predictive power in assessing how the price is going to move. Wang collected weekly data points for the past five years on both bitcoin price and Google Trends data for “Buy Bitcoin” and calculated the percentage change in data points to compare.

These weekly changes were used to explore three relationships:

  • The association between current Google Trends data and the current price of bitcoin
  • The association between current Google Trends data and the price of bitcoin one week into the future
  • The association between current Google Trends data the price of bitcoin one week in the past

All three relationships were found to have a positive correlation.

However, the highest correlation was seen between price increases and the “Buy Bitcoin” searches one week into the future. Wang also tested the statistical significance of these relationships.

A statistically significant relationship is essentially one where the possibility that it occurred due to chance is less than 5%. Of the three associations, only the relationship of price now and Google Trends one week into the future showed statistical significance.

What does this mean?

If the price is increasing now, there is a darn good chance that the Google Trends data for “Buy Bitcoin” will be increasing one week into the future.

This makes a lot of sense.

Increasing prices generate interest in buying.

FOMO.

What about the others? The data shows a relationship but the statistical tests show that there is a greater than 5% probability that the relationship is just showing due to chance.

Not good odds in the world of numbers. Effectively, the data demonstrates it would be futile to speculate on the price of bitcoin increasing one week into the future simply because the Google Trends data for “Buy Bitcoin” is increasing.

Thats a wrap…

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Disclaimer: Nothing in this newsletter constitutes financial or investment advice. You are completely responsible for your own decisions, obviously. Read the full disclaimer here.

Find out more about Adaptive Analysis.

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