Timing the Crypto Market Using our Rate of Change system

Bitcoin broke out of its downward channel on October 29^th and then retested it on November 3^rd through the 5^th. From there it shot almost straight up to test the 100,000 level on November 22^nd. Since then it has been consolidating in the $90,000 to $100,000 level preparing for another leg up.

From March 2024 Bitcoin was in a downward slanted channel. Typically when this occurs a breakout can be expected to travel in the same direction as it entered. So, since it entered the channel in the upward direction we can expect a breakout to the upside. And the more times it tests the upper limit the stronger the breakout will tend to be. In this case, we saw six tests of the upper limit before we got a final breakout and then a retest.

Beginning in August we got a smaller upward channel leading to the final breakout in November. This combined with positive rhetoric from Trump combined with a Trump victory and the typical 4-year BTC cycle and we have a recipe for a massive move in BTC. Typically BTC moves MUCH more than you could possibly imagine so this is still early days.

Timing the Crypto Market

Using our ROC (Rate of Change) system to look at the two biggest cryptocurrencies, i.e., Bitcoin and Ethereum gives us a unique insight to these Crypto Currencies. This month we have modified our charts to use the weekly prices so we can get a bit more precise timing.

So, let’s look at Bitcoin first. Bitcoin is EXTREMELY volatile, so the first thing we had to do to adapt it to the ROC analysis was to smooth out some of the volatility by using averages. Also, because Bitcoin has increased so rapidly since its inception we are plotting it on a “Logrithmic” scale. That means that the distance between every horizontal line is 10x bigger than the previous one. If we didn’t do this the early line would look flat in the beginning and the last part of the chart would shoot straight up. By using the logarithmic scale we can see much more detail in the early chart.

We averaged the ROC index to smooth out the bumps so it wasn’t crossing its red moving average lines 100 times. What we came up with was nice distinct crossings and a nice cyclical pattern. BTC is known for its cyclical nature due to the intrinsic code that created it. It is also to a great extent, outside the influence of government manipulations and this results in a much cleaner pattern. Basically, Bitcoin has a 4-year cycle, with three years up and one year down.

Buy Signal

Based on the Weekly Average price we got a Sell Signal the last week in May and a new Buy Signal the second week in November. Typically at this point in the 4-year cycle there is a MAJOR rally so we have been eagerly anticipating this buy signal. This time around ther are also new macro factors that should boost BTC even more than normal. These factors include the new BTC ETFs that were created at the beginning of 2024. In addition, we are getting a pro-crypto Congress and administration. Lower interest rates and an increasing money supply should also boost crypto prices.

The Bitcoin Cycle

As we can see, in May of 2015 Bitcoin (BTC) was selling for $228.70 and by January 2018 it was selling for $10,284. That is a massive move… but a little over a year later, it lost almost half of its value. The same type of drop happened from 2021 to 2022. So, if we can avoid that drawdown we can keep those massive gains, rather than giving half of it back each cycle. Although the ROC doesn’t capture the absolute high and low it comes very close.

Where are We Now?

The ROC generated a Buy signal in October 2023 signaling the beginning of the final parabolic up-wave of this cycle. This wave was supposed to last until roughly August of 2025. Instead it generated an All-Time-High (ATH) in March possibly due to the creation of the first ever crypto ETF. From there it spent most of the year consolidating before finally taking off again in November.

In June we said, “It is theoretically possible that we will get another false sell signal in the next month or so. But once this wave takes off it should be meteoric.”

In July we said, “…although it hasn’t shown up in the chart yet, we have experienced a massive sell-off in early July due primarily to a settlement of MT GOX releasing Bitcoins that have been locked up for several years (so holders will have massive gains that they couldn’t realize until now). In addition, both the U.S. and German governments have been dumping Bitcoins that they confiscated. So, that selling doesn’t represent true market forces. In the case of the government selling they may even be intentionally trying to drive the price down or just don’t care because it didn’t cost them anything to acquire the BTC in the first place. However, some German regulators are suggesting that rather than sell the BTC, they should hold them as assets instead. But historically, governments tend to sell assets at exactly the wrong time.”

BTC is no longer in its infancy.

We can’t expect percentage moves on the order of what happened from 2015 to 2018 because BTC is no longer in its infancy. But we can still expect great things, just not of the same magnitude, simply because BTC is now so much bigger, that it takes much more volume to double the price. On the plus side, BTC has new inflows from the new BTC exchange-traded funds (ETFs) that can allow traditional investors into the Crypto investment sphere once it starts moving up again.

BTC’s little buddy ETH has been underperforming Bitcoin and the market Buzz is that ETH has made some major missteps which shifted most of the profits to the Level 2 cryptos. In the long run ETH may recover but it will take time. Rumor has it that Solana (SOL) could overtake ETH this cycle.

Ethereum (ETH)

Hold Signal

Bitcoin itself opened the floodgates for Crypto and decentralized finance (defi) but BTC functions almost entirely as an alternative-currency. Ethereum has built on that foundation and is much more functional. Rather than being strictly a currency, Ethereum allows applications to be built upon its code to enable almost anything you can imagine to be done in a decentralized fashion. This makes ETH even more useful than BTC.

The one difference is that there is a limited supply of BTC built into the algorithm but the same limitation is not built into ETH. But ETH does contain supply limiting factors which include “burning ETH” when it is used to provide services. So, when demand for ETH is high the price rises. But some recent changes to ETH to enable layer 2 have temporarily created some lower profitability for ETH.

Looked at simplistically, ETH is useful and BTC is scarce. Recently, the FTC has determined that both BTC and ETH are “Commodities” so we can think of them like the electronic versions of Silver vs. Gold, or perhaps even better, Copper vs. Gold. Just as Copper is necessary for all sorts of building, and Gold is a store of wealth, ETH is becoming necessary for electronic transactions, and BTC can be used as a store of wealth.

On the ETH ROC chart we see the same pattern as on the BTC ROC chart having generated a sell signal in June, but it appears to have bottomed and is turning up toward a buy signal which could happen in the next week or so.

There are literally thousands of cryptocurrencies. Some good, some not-so-good, and some totally worthless. Ethereum’s nearest competitor is Solana (SOL) which serves a similar function as a “Layer 1” protocol. These are followed by “Layer 2” protocols that add functionality on top of ETH or SOL. They will be even more volatile yet. And finally, there are “MemeCoins” that serve primarily an entertainment function and are the most volatile of all. The interesting thing is that the vast majority of these coins follow roughly the same cycle as BTC and ETH but because they are smaller their percentage changes can be much greater. A 1-cent coin can go to a dollar (100x) much easier than Bitcoin can go from $68,000 to $680,000 (10x).

Crypto Stocks

There are several ways to invest in various Cryptos via the stock market. Recently there have been Exchange Traded Funds (ETFs) created for Bitcoin. And subsequently an Ethereum ETF was created giving both cryptos access to increased liquidity.

Prior to ETF approval, a company called Grayscale created “Trusts” that owned a fixed amount of various cryptos and then sold shares of the Trust. Unfortunately, those shares often cost more than the underlying value of the assets the Trust held, often many multiples of the cost. For instance, at one point, Grayscale Solana Trust (GSOL) had a Net Asset Value (NAV) of $50.56/share. But it was selling for a whopping $425.00/share. That is absolutely insane. That would be like me walking up to a guy on the street and saying I have this beautiful $50 bill and I will let you have it for only $425. No thanks!!!

But occasionally it works the other way around when market sentiment turns negative. As of 7/7/2024, there were three Grayscale funds that were selling at a discount. They were Grayscale Ethereum Trust (ETHE), Grayscale Ethereum Classic Trust (ETCG), and Grayscale Digital Large Cap Trust (GDLC). You can view all the current Grayscale NAVs and current prices here.

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