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There Will Be Blood – BTFD Edition (Vol 1)

Well, the bubble has burst. Bitcoin is dead… again. Stock are rekt. The world is burning on this day.

Truth be told, I’m not a subscriber to the “Bitcoin is a bubble” school of thought. I was there back in 2014, even shorted the hell out of it, but not today. If you want to talk bubbles, let’s talk derivatives or government debt. “But what about Shitcoins?” Don’t even start with me, you.

Bitcoin though? No. Different story for the world’s most uncorrelated asset.

It’s the Fundamentals, Stupid

First and foremost, let’s get something straight here… bubbles are the result of malinvestment. Specifically, over-leveraged, speculative borrowing. Now, malinvestment happens during periods of artificially low-interest rates and excessive credit expansion, much like we’ve had in conventional markets for exactly one forever. When credit expansion stops, as it always must (unless you believe we can borrow ourselves rich), debt markets contract. This is where the bubble bursts. Interest rates rise, malinvestment is exposed, and distressed assets are liquidated – hence, the crash.

This is business cycles 101 and newsflash, they’re primarily caused by Keynesian economics and fractional reserve banking. Still with me here?

Problem with equating this all to Bitcoin, is that a business cycle is not inherent to Bitcoin. It’s the anti-christ of Keynesianism built on Austrian principles, upgraded with trustlessness, fixed supply, and immutability. Bitcoin is sound money in a time where sound money doesn’t exist. Now, I get it, everyone lives on fiat, so to some degree, Bitcoin is surely affected by the business cycle? Yes, of course. I don’t think the fiat business cycle drives the bus in Bitcoin as it does in equities or fixed income though, for example. Ask me again when central banks are hooked up to Bitcoin exchanges.

The fundamentals and value of Bitcoin have not been destroyed by malinvestment. The same can not be said for your typical bubble. Take the dotcom bubble of 2000, or the US housing bubble of 2008. Fundamentals from those periods were… not good, to say the least. Bitcoin fundamentals today, by contrast, have never looked better.

Where’s the over-leveraged, speculative borrowing and excessive institutionalized lending? Last I checked, banks are shutting you down for buying Bitcoin… this is not a credit-fueled boom. That doesn’t mean fiat debt isn’t finding its way in, but, it’s a drop in the bucket. Your average Joe isn’t putting a second mortgage on their home or buying 100x futures, they’re taking real savings and buying actual, unleveraged Bitcoin – with a mind to hodl.

The world is starting to trust Bitcoin. I say starting because relative to its rarity and other less rare and useful supplies, Bitcoin prices are still very low. The market confirmed that with massive volume above 10K… that’s value acceptance, and we’re just getting started. A bit different than spoos floating through space if you ask me.

Anyways, just a theory, but equating the word bubble to Bitcoin doesn’t work for me yet. Maybe I’ve gone full bulltard, but when you consider the trade we’ve seen over the past year or so, I just don’t see the bubble.

Moon? What Bloody Moon?

Table 1: Every $BTCUSD roundtrip move since 2010

So, I decided to look at every price swing up and down in Bitcoin since 2010. I looked at the Mt. Gox and Bitfinex $BTCUSD 1-week charts with the minimum criteria being a >15day >20% loss/gain. Wicks are ignored, this table calculates movement based on opens and closes. The goal was to smooth price action as much as possible.

Lots of insight here, which also form the charts below. Let’s look at some of the standouts first:

1) If there ever was a bubble in Bitcoin, it lasted 780 days from 2012-02-20 until 2014-04-13 (highlighted green). This period coincided with the 2 largest adjusted returns (1655% & 467%) in 7.35 years of trade.

2) Your mileage may vary, and we can argue semantics, but the only bear market I count came immediately after that massive period of growth (highlighted red). It lasted a total of 278 days and resulted in a 49% adjusted loss over that span, the only loss recorded.

3) Apathy set in for about 6 months immediately after that. It resulted in the smallest, and only periods of single-digit adjusted gains (highlighted grey).

4) Though the 2017 dollar gains were breathtaking, the adjusted returns were unremarkable, and below average for Bitcoin. This was a steady and well-consolidated grind. The last 4 cycles have seen the top 4/5 average daily losses and were the only 2-digit adjusted gains observed.

5) Assuming a low of $6000, the current pullback is the 2nd biggest percentage loss (-68%) after the 5th largest percentage gain (419%) for an adjusted return of 64% (the 3rd lowest). The only larger percentage loss (-88%) occurred after a 2407% gain with an adjusted return of 197%. Losses of -53% and -58% occurred after gains of 3622%, and 1255%, netting adjusted gains of 1655% and 467%, respectively.

Again, this last year has been well consolidated on short cycles, making a bubble seem quite unlikely.

Table 2: $BTCUSD price swings sorted by direction since 2010

Scorched Earth for the World’s Most Trusted Shitcoin

All things considered, Bitcoin looks ready to lay another beatdown on $USD in 2018. It’s easy to get hung up on dollar gains but when you realize fiat is just another altcoin, $BTC could be poised for some breathtaking percentage moves.

First of all, here’s every price swing detailed in Table 1, charted in $USD. Data points are closes from each cycle and plotted over a sequential date range, so we can see the length of each move as well.

Let’s remove the noise and look at only at consolidated $USD range. This ignores the close from the move up, and only considers the close from the move back down. Again, spread over sequential time.

Look how much $BTC has appreciated against $USD after massive selloffs. Bitcoin is still holding huge dollar gains.

Here’s the thing though. This is the same consolidated price range plotted with adjusted returns. Again, huge appreciation against $USD, but look at those average and dwindling returns. The dollar is getting crushed among the lowest percentile round trips observed.

Same chart here plotted in a different way. You can see price trending up with adjusted returns trending to 0. Can’t imagine that trend continues forever. While people are sensitive to fiat valuations, honey badger doesn’t care about shitcoins. We’re probably due for a large percentage move on the broader scale at some point.

Here’s price over cycle length. You can see price trending up with time trending down. Cycles are accelerating. That’s not what we would expect to see in a market bubble. Bubbles are typically formed over large periods of poorly consolidated gains, hence allowing over-leveraged positions to survive.

Again, while cycles accelerate, adjusted returns are dwindling. I see what you might call a bubble here, but it happened in 2013. 2017/18 looks absolutely dead by comparison.

Here you can see percentage gains isolated. If nothing else, Bitcoin has become a much more efficient market. You can see percentage gains trading near the bottom of the scale, and trending down. The last run was a decent uptick in growth and broke above the trendline.

Another thing to note is the length of these cycles. You can see periods of short cycles have been followed by periods of long cycles. Durations are trending up and increasing of late, could Bitcoin see another extended bull market?

These are isolated percentage losses. Notice here how short and deep the cycles are lately, best illustrated by average daily returns. Interesting to note that extended periods of decline have only followed periods of 4-digit percentage gains, as you would expect.

While the length of the 2018 pullback is ticking up, it’s already extreme in the percentage lost scale, and disproportionate to the comparative gains observed. This move has already smashed a trend of decreasing pullback percentages, typically seen only after the largest of percentage gains. Further downside risk could be relatively well contained by this measure.

Daily returns are trending down to larger losses on a trend of shorter cycle lengths. This with overall losses trending up. Despite volatile dollar range, this again appears to be a market becoming more efficient.

What Does It All Mean?

Well, first and foremost, this data took a while to compile. I’m always open-minded to other opinions, I’m especially keen in this case. Would love to hear thoughts on this beyond my own echo chamber. Please, share here, on Twitter, wherever.

That said, let’s sum up my general thinking.

For one, bubbles don’t happen overnight. They don’t happen in a few weeks. They don’t consolidate range as everyone crowds the bid and pounds the ask. I don’t see the bubble.

Did we see a huge selloff? Yes. Yes we did. Are we calling these bubbles now? Last I checked, Bitcoin was known for this. That’s why we call it ‘king of the full retrace’, and guess what, we’ve now retraced the majority of the last move up. Breaking news ya’ll, that ain’t new. In my first post about Bitcoin back in 2013 I wrote:

BTC has ramped, crashed, and continued to rise its entire life. That’s what it does…

I believe in expectancy. I don’t like predicting things or calling tops and bottoms. I ride the wave. My money is on that pattern continuing. Could it all go down in flames? Sure. What’s the probability of that result though? Very low based on historical data. I don’t know if we’re done unwinding, and as I said on Twitter, keep your powder dry.

At the end of the day, all things considered, it’s still conviction BTFD in Bitcoin markets from the cheap seats over here.

Coming Up After the Break…

This is the start of a 3-part BTFD series. Next up is technical analysis on current ranges. If you know me, you know I love fancy lines and that I don’t remove them for no one. Well, I removed them all and broke each down, one by one… just for you.

After that, we’ll look at trading vs. investing. We’ll cover topics like risk management, portfolio allocation, and position sizing.

Hope you enjoyed. Stay tuned!

Related Posts:

There Will Be Blood – BTFD Edition (Vol 2)


Aurie Philipchuk

Bitcoin fellow. Entrepreneur with a trading and investment background. Jack of all trades @Tractai.


2 thoughts on “There Will Be Blood – BTFD Edition (Vol 1)

  1. Fantastic analysis work, And I like how you built up the argument.

    The one thing missing (and perhaps you plan to address in later parts?) is the question of where does it lead? I have seen things like ‘x percentage of offshore wealth, if moved into BTC will equal 300k per coin,’ or ‘if y amount of money that holds bullion were converted to BTC, we would see a price of 500k.’

    What is your take? The two examples above are usually presented without the level of reasoning you use to make the case for there not being a bubble, so (if you have thought about it), I’d be interested to read.

    Thanks, and looking forward to future installments!

    1. Whoa, there’s someone in my echo chamber haha.

      I do absolutely think those upside ranges are possible and even likely. Touched on it a bit here not long ago: http://aurie.me/is-bitcoin-a-bubble/

      I’ll revisit upside targets for a shorter horizon in Vol 2 of this series as well (hopefully by tomorrow).

      Thanks for the kind words!

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