Bitcoin Price Patterns to Predict Future Trends

I am putting together a report by overlaying recent Bitcoin price movements against the best matching past occurrences to see if there is any predicable continuation.

Currently there are no graphs or back testing to see how the different parameters affect accuracy.

I have some preliminary numbers based on comparing a dataset of 6 months, 8 months and 12 months then looking at the average outcome when looking forward from those matches out to four months.

6 Months  1        2        3        4      
 Upside  115  117  118  118 118  118  118  118 118  118  118  118  118  118  118  118
 Average  94  100  101  102  102  101  100  99  98  97  96  94  93  92  90  89
 Downside  105  96  95  93  88  86  85  81  78  75  73  72  69  67  62  58
8 Months                                
 Upside  115  118  121  126  133  149  160  165  166 166  166  167  171  175  178  183
 Average  94  103  105  108  111  114  118  121  123  124  126  126  127  127  127  127
 Downside  105  102  101  101  100  100  99  99  98  97  97  97  97  97  97  97
 12 Months                                
 Upside  117  128  134  159  195  251  297  323  333  341  350  352  353  362  368  374
 Average  95  106  113  122  132  146  163  178  188  194  199  205  211  216  221  226
 Downside  105  105  105  105  105  105  105  105  105  105  105  105  105  105  105  105

The columns are weeks projected into the future and the numbers are percentages. So when comparing 6 months of data to find the most similar past pattern the best outcome after one week is a return of 115%, the second week is 117% etc. All of these numbers are based on the price data pattern as of July 10, 2018.

A big disclaimer; this is not a prediction, just because the past data set closely matches does not guarantee that the trend will continue.

These are just a small sample of results with random parameters. When using a larger pattern to compare with past data can result in more specific matches but at some point reduce the amount of range to search through.

A big issue with this approach when comparing patterns on historical data is tuning the parameters to the dataset rather than fundamental patterns. This comes through in the fact that the 6 month pattern predicts a decline in price and the 8 and 12 month data set predict an increase in price.

I will have to experiment with back testing different parameters to get a good sense of accuracy if any on historical data and the future prediction. That will come later.

Update July 11, 2018

Here are a small sample of back testing results. The data samples are collected in days back from 180 all the way back to 1275 three and half years ago. The data sets were run using 6, 8 and 12 months of data respectively and the results are shown as projected average divided by the actual percentage change ninety days later.

 Days Back  1275  1095  910  730  545  365 180 
 Date 2014-10-02 2015-04-05

2015-10-07

2016-04-03

2016-10-25 2017-05-26 2018-01-10
 Price  $373  $254  $243  $418  $657  $2177  $14000
 6 Month Set  89/85  105/100  102/177  130/156  120/176  188/199  260/48
 8 Month Set  46/85  93/100  121/177  110/156  116/176  216/199  199/48
 12 Month Set  214/85  113/100  123/177  129/156  148/176  265/199  141/48

Overall the results were kind of interesting. There are some correlation but also some significant misses. More resolution and adjusted parameters may make this a more useful report.

Bitcoin Criticism – Broken Window Fallacy

I like to follow the wider crypto currency news and industry developments. I often come across wild exuberance and extreme criticism. Over time I have noticed that a lot of points against digital currencies that while valid at the time quickly change with the adoption of new people and technology.

Early on the most common criticism of Bitcoin was that it wasn’t worth anything. People were mining 50 BTC in blocks with hardware on there desktop. Anyone could accumulate hundreds of BTC if they wanted to unfortunately no one could have guessed that they would become as valuable as they are now. In hindsight it seems funny to criticize the absence of price when it is often the most significant characteristic to newcomers.

After the value criticism was that no one accepted it for payment. Only a handful of stores accepted bitcoin. While most businesses still don’t accept bitcoin there are a significant number now and new integration services that make it easy for new stores to start. Also now that the value Bitcoin is widely known more people are now willing to accept it in place of dollars.

The next criticism was that Bitcoin has no intrinsic value. It was common to compare it with the Dollar but in comparison there is no intrinsic value of the dollar. People also compared it with gold because you can hold it and that is true but it doesn’t mean that an electronic currency can’t provide value on it’s own.

Lately the criticism of Bitcoin is that the network doesn’t have the capacity to handle enough transaction volume to support a larger economy. While the core network is limited to about seven transactions per second there are many groups working on solutions that will allow significantly more in the next few years.

I’m not saying that criticism can’t point out valid issues with Bitcoin but in the context of changes already in motion it makes sense to make a hedged guess and use the opportunity as an investment.

One of the most bizarre criticisms that I disagree with is that Bitcoin, or others like it, can never be used in a functioning economy because the deflationary nature of currency issuance will cause people to save instead of spend. As a result businesses in their economy will not have enough customer demand to survive and the economy will collapse.

I believe that most people who make this criticism are viewing this as a variant of the broken window fallacy. The broken window fallacy says that destruction of a local town shop window is good for the economy because it necessitates the services of a local window repair person, thus earning them money to support their family. Of course this is a fallacy because the net result is a loss as the cost to the shop owner is more than the gain to the window repair man. The shop owner also would have used the same money paid the repair person to spend in the economy.

In this example the breaking of windows is analogous to inflation of the currency.

Most people have lived in a financial system that inflates savings for their entire life and simply can’t comprehend anything different.

In an economy with a different monetary policy people will still need to buy things in order to live. Currently with dollars there are incentives to spend because the value of dollars are eaten away as time passes. In a Bitcoin based economy the incentive might be to hold rather than spend if they are on the fence of a purchase. But people would still buy the things they need.

The key point is that people have to work in a dollar economy to replace the value that is eaten from holding dollars. Does this necessitate the creation of unnecessary work? Is the current expansion of production and consumption of natural resources unsustainable? I think so.

People right now need to work because in a fractional reserve based economy any assets are quickly eaten away with a small amount of deflation. Most people need full employment to just get buy.

I’m not suggesting that Bitcoin will become a predominant currency but rather than the hypothetical outcome isn’t necessarily worse than the current system.

Update:

As a counter point to the broken window fallacy comparison the argument has be made that the key point of the effect of deflation is reflected in the use of effective resources rather than the observation that some things are broken. In other words it is more desirable irrespective of currency system to make optional use of all available resources, human labour and capital as it provides opportunity for growth and leaning. Additionally people don’t hold dollars because of inflation and as a result don’t significantly suffer as a result. All interesting ideas.

Trading Bitcoin Manias

This post describes a trading strategy that I am using with digital currencies specifically Bitcoin. The system I use to trade is available online for free at http://algomega.com. To use it you would need to open an account on an exchange and that can take several weeks to complete.

My expectation of gains is high, 50% per year for the next two to five years. In my eyes this is an opportunity for gains if the market continues it’s volatility and or upward trend. Even as a small portion ones invetments this strategy could add a boost to financial independence.

These high expected returns make a big difference. As a comparison, I met with a financial advisor recently about managing my stock and bond investments. I currently hold self directed accounts and do rebalancing myself. The management fees of the financial advisor in the ballpark of 1.5% meant he would be making 65% of the income I wanted to withdrawal on for living expenses. That is a lot. If Bitcoin does go up by 50% per year it could be used to make gains not possible elsewhere at the same level of risk.

This strategy is based on the assumption that the price of Bitcoin will go up over the next few years. Trading the extreme peaks and valleys reduces the risk of buying at an all time high and also grow a cash reserve hedge. It’s pretty clear that Bitcoin has done well in the past but there have been times where people have bought in at a price that quickly dropped and then it took years to recover. This strategy hopes to reduce the likelihood of this happening by indicating times when not to buy when the market is overbought. This strategy also keeps a cash reserve as a hedge so that if the price was to drop unexpectedly you have some assets remaining to buy in or use for other purposes.

I personally believe that there are several reasons the price rise is likely but I won’t cover them all here. Some of the top reasons include the rapid activity of the developer community, improvements to the software and supporting infrastructure and businesses starting to work with digital currencies, the increasing user adoption rates and the gradually reducing production supply of the currency all play parts in my personal assessment.

The mania is a metric that measures rate of change both up and down over time. When the price rises at a rate that is higher than 99% of the past historical trading data then it is seen as a good indicator to sell a portion of holdings as the price and rate of rise always reverts in the other direction. The same applies to drops in price. When the price falls at a rate that is faster than 99% of the historical data it has always followed a reversal upwards and is a buying opportunity. When everyone is selling cheaply people panic but it has historically been the best time to buy.

The trends measured take into account a long term timeline. This means I look at trends based on the largest frequency of price cycling to reduce the risk of being caught out from an unexpected trend reversal. The long term objective is to accumulate bitcoin and trade when the indicators mark opportunities that only occur a few times per year at all. This makes it a low time commitment strategy.

btc_mania

Here is an example report showing the Bitcoin price (Blue) against the mania (Red and black). You can see that durring the past price spikes the mania levels went above 1.5 and this would have been a good time to sell and definatly not a good time to buy. Durring the downturns when the mania droped below 0.4 the price has over time gone up and this has been a good time to buy in my experience.

A lot of people tend to think that they need to trade daily or weekly on short term trends but this is more work and not something that I do. I originally started out down this road and there is a reason why I don’t do this any more. I wrote a stock and crypto trading bot that used a genetic algorithm to learn an optimal strategy for profitable trading. After letting it run for months and years the bot did make a lot of money but less than simply buying and holding Bitcoin or dollar cost average buys.

This is not financial advice. Any investments you make are at your own risk. The value of Bitcoin or any other digital currency could for unforeseen reasons go to zero. It is important that if you buy into these currencies you are aware and can accept this risk. Only buy an amount that you are comfortable loosing.

 

Minimizing Your Risk When Investing In Bitcoin

OneLife_Slider2

When the price of Bitcoin hits all time highs, as it has been for the past few months, people often ask me how they can buy. But then they worry that the price is about to drop once they do buy for the first time.

This happened to several people I know during the 2013 spike where the price peaked $1100 USD then proceeded to drop below $300 over the following three years.

2013

Now that the price is $4200 up from $1000 six months ago, how do you gauge the likelihood the price will drop? It is possible to do market research and make an assessment of what the price will do but ultimately there is no surety it will go up even if all signs point that way.

In order to protect yourself from price drops you can use a hedging buy strategy to accumulate Bitcoin over the long term in a way that reduces your losses when the price goes down.

Here is a buy strategy that will reduce the effect of declining prices after purchase. This will reduce the amount of time where you are holding a loss on your purchases and also reduce the amount of loss when the prices drop so that you have more equity in case you need it unexpectedly. 

On a regular interval, once per month, make a regular investment of a fixed amount of dollars into two parts, one use to buy Bitcoin on an exchange at the current market rate and the other half portion set aside a pool of cash. Each purchase make an entry in a spreadsheet to keep track of the date, purchase amount, cash pool contribution and then calculate your average purchase price from all of your purchases.

If the price rises continue adding equal portions to new BTC purchases and your cash pool. If however the price of Bitcoin falls below the average purchase price from your past buys then in addition to making your regular BTC purchase and cash pool contribution make an extra BTC purchase using your cash pool. The amount to purchase can be up to the same ratio of the total available cash pool as the drop in value of BTC relative to the amount you paid for it. For example if the price of Bitcoin drops to seventy five percent of what you paid for it use 25% of your cash pool to buy more BTC at the lower level.

This will have the effect of reducing your average purchase price because. When the market makes large drops for extended periods of time this gives you the opportunity to make use of the cash pool to purchase at a lower price. In the event that you need to pull out BTC or cash unexpectedly you will have both cash and BTC that you can sell at a price closer to the market.

It is important to make purchases on a regular schedule however and not make these cash pool purchases too frequently or you risk disrupting your allocation from small market corrections.

Also note that this strategy implies that you are speculating on future price actions. While this strategy does better than buying 100% Bitcoin of your monthly contribution if the price goes down, it will not return the same gains if the price continuously goes up. You are trading some upside potential for downside risk protection.

Feel free to adjust the recipe to your taste and let me know how you do with it. Other possibilities would be to invest the cash pool in another liquid asset that will return interest.

Why do this? It’s extra work but if you compare it to other investment options it may be a good fit if you want to claim a stake in the cryptocurrency market but are not comfortable with the psychological effects of a massive market downturn right after you buy in for the first time.

How does it perform? If you were to start investing at the market peak in December 2013 as an example and simply put $200 aside each month where $100 goes to purchasing Bitcoin and the other $100 into a cash reserve you would end up with the following month to month gains:

Bitcoin Market Value Bitcoin Gains Cash Reserve Amount Invested Invested Gains
$100.00 $0.00 $100.0 $200 $0.00
$163.55 $-46.89 $200.0 $400 $-36.44
$275.40 $-36.67 $300.0 $600 $-24.59
$300.97 $-124.79 $400.0 $800 $-99.02
$348.69 $-198.61 $500.0 $1000 $-151.30
$424.95 $-242.32 $600.0 $1200 $-175.05
$645.06 $-123.97 $700.0 $1400 $-54.93
$775.77 $-93.68 $800.0 $1600 $-24.22
$854.94 $-115.27 $900.0 $1800 $-45.05
$868.31 $-205.36 $1000.0 $2000 $-131.68
$776.22 $-414.75 $1100.0 $2200 $-323.77
$784.58 $-531.99 $1200.0 $2400 $-415.41
$963.04 $-467.16 $1300.0 $2600 $-336.95
$880.85 $-680.18 $1400.0 $2800 $-519.14
$761.81 $-966.09 $1500.0 $3000 $-738.18
$905.85 $-971.69 $1600.0 $3200 $-694.14
$971.69 $-1055.28 $1700.0 $3400 $-728.30
$995.69 $-1187.72 $1800.0 $3600 $-804.30
$1145.67 $-1180.93 $1900.0 $3800 $-754.32
$1301.41 $-1157.91 $2000.0 $4000 $-698.58
$1649.25 $-922.68 $2100.0 $4200 $-450.74
$1371.18 $-1339.30 $2200.0 $4400 $-828.81
$1518.44 $-1322.99 $2300.0 $4600 $-781.55
$1997.18 $-952.61 $2400.0 $4800 $-402.81
$2271.77 $-781.29 $2500.0 $5000 $-228.22
$3322.65 $168.12 $2600.0 $5200 $722.65
$2963.19 $-290.33 $2700.0 $5400 $263.19
$3424.88 $70.87 $2800.0 $5600 $624.88
$3541.65 $87.07 $2900.0 $5800 $641.65
$5569.32 $1983.19 $3000.0 $6000 $2569.32
$5521.94 $1809.35 $3100.0 $6200 $2421.94
$4940.52 $1115.27 $3200.0 $6400 $1740.52
$5307.50 $1366.10 $3300.0 $6600 $2007.50
$6095.08 $2026.52 $3400.0 $6800 $2695.08
$8553.84 $4310.38 $3500.0 $7000 $5053.84
$9344.36 $4914.58 $3600.0 $7200 $5744.36
$10111.96 $5485.55 $3700.0 $7400 $6411.96
$11112.97 $6274.96 $3800.0 $7600 $7312.97
$16094.53 $10938.43 $3900.0 $7800 $12194.53
$26040.85 $20343.25 $4000.0 $8000 $22040.85

After investing $8000.00 over four years your net assets would be worth $30,040.85. This is a 93% yearly return on total capital thanks in part to the uptrend at the end of the run in 2017.

Notice that when using the 50/50 cash/Bitcoin buys the Invested Gains is higher than the Bitcoin Gains when the market is negative. This is what you are gaining with the cash reserve.

The purpose of hedging each monthly investment in cash is to reduce the amount of losses each month where you are holding less in market value than you invested. However by doing this you are reducing some of the upside gains if the market goes up. If you had invested all of the $200 each month in Bitcoin your net assets would be worth: $52,081.70 a 162% yearly gain on total capital.

When using the cash reserve to buy during times when your market value is lower than your purchase price puts you somewhere in the middle of these options returning $43,510.60 using a small purchase amount. Although this reduces your ongoing cash reserve as you as using it to buy Bitcoin when the price is lower.

These different buying strategies illustrate to me how asymmetric the Bitcoin market has been. While you can reduce your monthly losses with a cash reserve by about 50% (up to $600 in some months) the overall cost in this particular time frame is $22,040.85 as this is how much more you would earn buy putting $200 per month into Bitcoin rather than $100. That is how much you are paying to hold more liquid assets thought the four years.

Disclaimer: This is not investment advice and is only my personal thoughts on possible options for purchasing Bitcoin. One of the challenges on choosing an investment strategy in Bitcoin is that because the market is so volatile even small changes in the timeframe of past data will give you a very different result. This makes it very easy to choose a strategy that works on past data but doesn’t necessarily take into account future trend possibilities. In other words, make sure you do your research and be certain you are comfortable with the results if the market goes down, up or flat.

 

 

Cryptocurrencies

bitcoin
This is a brief summary of my thoughts on cryptocurrencies specifically Bitcoin as an investment. Going forward I will add more about different aspects of the currency and surrounding products/markets as well as alternatives.
I am buying Bitcoin now at regular intervals because I believe that the price two years from now will be higher than it is now.  If the price four weeks from now is down ninety percent I will not be bothered. It dropped ninety percent between June and December 2011 and seventy five percent between November 2013 and August 2015. Aside from those notable drops it also saw fifty, forty and thirty percent declines many times. If you are going to buy Bitcoin be prepared for drops like these.
So why buy when the price plummets like Humpty Dumpty? Well in my opinion only because Bitcoin has always put himself back together again and in the process accumulated more users, new use cases and higher demand. Over the few years that Bitcoin has been available and trading the rate of returns is significantly higher than most if not all other options.
Why I think Bitcoin is going up:
1) It provides strong utility that will likely be useful in a wide variety of areas including: international settlement, peer to peer payments, trust-less money transfer contracts between remote parties, store of wealth, etc. Before Bitcoin there was no method of distributed transactions that did not require a third party that I am aware of. Given the current trend, more people will use and adopt Bitcoin in the future and with a fixed supply the value of units should be bid higher. I will expand on use cases and potential opportunities in the future.
2) User adoption numbers are going up. Google trends results for people searching for ‘Bitcoin’ is increasing 400% per year, ‘what is bitcoin’ 150% and ‘buy bitcoin’ also at 150%. Each year more exchanges open with better infrastructure funding options and trading services. Stores and payment processors are also opening slowly allowing people to buy and earn Bitcoin from their work.
The experience of most new users is good, while some leave and some stay,  the ones that stay are usually hooked. Some or a lot of people obviously bought at the peak times and then watch the price plummet and want to get out. Based on number of users active and signing up for exchanges, wallets web and forums, the user base is growing year over year.
3) Legality. In the early years of Bitcoin there was a lot of uncertainty that it was legal. The closest thing to Bitcoin, E gold and others were shutdown for violating money transmission laws in the US. Because Bitcoin doesn’t fit any traditional definition of money creation and transmission it was uncertain that it would be legal to use, own, trade, earn or buy using Bitcoin. Since then many countries have issued statements and guidance as to how they will allow and regulate the markets adding some level of certainty to investors and users.
Bitcoin is illegal in some countries however so you should check with your local authorities to ensure you are compliant with the law.
Criticisms of Bitcoin:

1) Deflation is Bad.

The issuance of Bitcoin is set at a fixed rate that is cut in half every four years until 2140 when it will stop and the only source of the currency will be that of existing owners. In the next ten years the rate of inflation will drop from 4.2% to 0.8%.

The concern is that during increased demand for currency, its availability will shrink because of a perceived higher future value. People will hold off purchases because they expect to get more bang for their buck by waiting. This will cause economic velocity to go down and prevent new lending and future growth.

This is what happens to dollar based economies. The comparison doesn’t hold though because a dollar economy is based on fractional reserve lending that has a different dynamic applied to the supply that is not applicable to Bitcoin. All dollars are created by banks as debt with interest attached but the interest that needs to be paid was never created. There is an ever expanding amount of debt attached to all actors in the dollar system. In the event of deflationary changes in the dollar economy all available liquid cash would not be enough to even pay the interest on debts let alone living expenses like food, rent, clothing. This causes all available supply of currency to quickly go to zero. Banks cant lend because they don’t have enough reserves and individuals can’t lend because they have to pay everything they have to cover existing interest payments.
This wouldn’t happen in a Bitcoin based economy to nearly the same degree. Granted during an uptrend most people would presume a higher future value of the currency but the supply would likely only contract in a linear fashion. People will still buy things, just at an adjusted value, probably.
2) It’s Too Volatile.
Bitcoin is volatile so be careful. If you are not comfortable losing your investment in Bitcoin do not buy any. If you can set aside some funds to buy without any exception on timeline for withdrawal, Bitcoins historical high rate of return and potential future expansion could outweigh the risks provided you can commit to a plan. The plan should help you avoid the case where you feel tempted to panic sell after a price drop.
Volatility in the several markets are a really good aspect to Bitcoin in my opinion. It means that users have the ability to buy and sell at prices they choose any time they decide.
There are strategies for mitigating market volatility like dollar cost average purchases and sales over time so that highs balance out lows.
3) Criminals and Drugs.
A lot of people only associate Bitcoin with drug dealers on the dark web committing crimes. They don’t want any part of something associated with criminals.
The bottom line is that a currency for everyone has to work for everyone or it wouldn’t be valuable. Regardless of how you feel about it, you can’t control what others do. I believe Bitcoin is helping people and will continue to do so in new ways. Obviously using it is a form of support and you are entitled to choose not to use it if you feel that is the right choice for you.
4) Not a Real Currency and People are just Speculating.
Some say buying Bitcoin is not an investment it is gambling because you are betting that the price will go up just because it has gone up in the past. You shouldn’t assume that past performance is an indicator of future returns. Sure but the distinction between investment and gambling is a grey area of one slippery sliding slope. Based on someones opinion all investments have some level of risk of collapse and assumption of growth based on past performance. Most people just don’t think about the risks because they may happen infrequently. Most people recommend buying stocks and government bonds because stocks are often evaluated based on past performance and bonds are still subject to default or devaluation risks.
The fact is people are using Bitcoin as a currency. People are right now earning income in Bitcoin, buying everyday things with it and trading it with others.
Some people say that Bitcoin has no intrinsic value. My thought is that nothing has intrinsic value. Everything is relative and depends on relationships with everything else. The network that connects Bitcoin users really is the essence of its value.
Detrimental factors affecting the price:
1) Inflation Rate
New currency is issued with each new block on ten minute intervals. This new currency is issued to miners and results in an increase to the total supply of Bitcoin. When the new currency is sold on exchanges it creates additional downward pressure on the price. Every four years the number of Bitcoin issued for each block creation is cut in half, reducing this downward pressure.
Back in 2013 at the peak around $1000 there were 25 BTC issued every ten minutes. The price dropped after that peak but for comparison the value of currency created each day was $3,600,000. When I started this article in July  the daily created value was $4,860,000 and by the time I finished it the price had risen resulting in a daily value of $6,120,000.
While this value is high the currency is traded world wide so dividing this dollar amount by the increased number of participating traders makes this a more optimistic metric.
The most interesting observation about the amount of this newly created currency will be to compare it to the inflow of currency which I am sourcing now.
2) Technical Risks.
Bitcoin could fail catastrophically for unforeseen technical reasons. Or something new could come out tomorrow that makes it irrelevant. My estimation of this actually happening is very low because the mechanics of the currency are used in a lot of diverse and time tested systems.
3) Crime and Safety
Holding cryptocurrency involves a certain level of risk as criminals could steal your holdings using malware. It is important to understand the risks and proper use of cryptocurrency to ensure you keep it safe.
4) Regulatory Legal Risk.
While this is a much lower concern now than it was years ago, in the future government agencies may place restrictions on your ability to buy, hold and sell cryptocurrencies. As adoption grows and government agencies from around the world make their position known it is becoming clear that road blocks of this type are minimal.
My Strategy
My strategy in the past has been to buy when the price is historically low and going up then sell when the price is historically high and going down. This allows me to accumulate during periods of undervaluation and take some profit during periods of overvaluation.
Currently I am buying small amounts every pay cheque to accumulate an amount over a fixed period because I believe there with be growth over the next year.
I have built and use a web service that tracks top cryptocurrencies and reports on different metrics. I also have a trading bot that I can test against historical data. Despite my best efforts so far the best strategy is still to buy and hold when you have capital and to buy regular amounts over time if you have income.
As a final thought. Personally I find crypto currencies very interesting but if you want to invest there is a lot you need to know to use it properly and even with precautions it is very risky. This is not financial advice and I do not recommend that you invest with money you are not willing to lose.