Timing the Crypto Market Using our Rate of Change system

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. For the index prices, we are only using the monthly closing price. So, on the index, we won’t see all the absolute highs and lows.

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.

Unfortunately, our ROC also generates one “false sell” every 4 years, that we are unable to smooth out. But it occurs regularly enough that it is easily recognized. The key thing we want to do when investing in crypto is to avoid the massive drop at the end of the cycle. And the ROC helps spot that very well.

Sell Signal

Based on the Monthly Average price at the end of July, we have a Sell Signal. The price action in August drove the ROC index even further below its moving average exacerbating the sell signal. Whether this turns out to be another false sell signal remains to be seen but this isn’t when the False Sell generally occurs.

The Final Blow-off Top of the Cycle

As we can see, in May of 2015 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. At the moment, we either have a false sell signal, or the cycle was cut extremely short.

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.”

Since the ROC signal is based on price action this excessive selling pressure could have caused a false sell signal trigger, which has been further exacerbated by weak hands panicking out of BTC. But had we heeded it, we would have been prepared for the recent drop.

The Wyckoff Reaccumulation Pattern

There is a class of thought called the Wyckoff Pattern which was created in the 1930s. It seems to hold well in many financial markets, but especially in the crypto market. The cycle includes four phases. The Accumulation Phase causes the Mark Up phase (effect), and then the Distribution Phase causes the Mark Down Phase (effect). The interesting thing about this pattern is the corresponding volume indicators. The following chart shows a stylized version of the Wyckoff Pattern.

Source: TradingCoach.co.in

Comparing the stylized chart to the actual BTC chart since March we see some major similarities. Our job at this point is to determine the positioning of the points labeled A, B, and C below. Up until the recent correction, we were assuming that point “A” was the point labeled “Low Volume failed selloff” in the stylized chart. It was certainly “Low Volume”.

If that was the case, point “C” would be the point labeled “test” but then it shouldn’t have gone lower than point “A” but it did.

So, point “C” could very well be the “failed sell-off “. If that is the case, the little peak at the end of August would be the Blue asterisk and we are very near the red asterisk labeled (test).

If that is the case, the next move should be up and out of the channel to begin the final “Buying Climax”.

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 should tag along and perform even better percentage-wise.

Ethereum (ETH)

Sell 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. That being said, we can expect ETH to eventually rival BTC, giving ETH much more upside from current levels. 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.

Smaller Cryptos

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 $63,000 to $6,300,000.

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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