Month: December 2022

Long Term Update: 2023 Outlook with entropic methods

On By CryptoAdvisorIn Long Term Trading7 Comments

I will be busy in the coming days, so the yearly update for 2023 is being released early.

Every year i post an outlook using entropic methods explained in the technical section of this blog. Here you can find the 2015, 2016, 2017, 2018, 2019, 2020, 2021, and 2022 forecast update, where you can find more information about this approach.

Updated values for bitcoin (in brackets values of 2022) using daily data since August 2010 (from now on I will use only BITSTAMP data, as today there are not many differences between major Bitcoin exchanges.).

   BTC/USD
Growth Factor G 1.00090 (1.00130)
Shannon Probability P (see this as entropy) 0.5214 (0.5254)
Root mean square RMS (see this as volatility) 0.049 (0.049)

The entropy values of Bitcoin versus the USD have remained relatively consistent in 2022. The Growth Factor (G) has decreased slightly to 1.00090% compounded daily or 139% per year, which is less than the 168% seen one year ago. The optimal fraction of your total wealth to invest in Bitcoin has slightly decreased to 4.3% (~0.5214*2=1.0428 – 1 = 0.0428 or 4.3%, which is still roundable to 5% like last year).
The volatility of Bitcoin, unlike in previous years, has not decreased this year if we consider the average value from the beginning of the historical series, around August 2010 and it appears that for now, it remains stable at a fairly high value when compared to other assets such as gold, stocks, bonds, and forex currencies.
Despite a challenging year in 2022, the BTCUSD growth factor is still much better than traditional markets, except for the Shannon Probability, which still matches that of the US stock market (around 0.52). This means that on average, out of 100 days, an asset goes up 52 days and down for 48 days. 

 2023 Price forecast  Full Historical Volatility  Half Historical Volatility
Forecast using only G* ~23,000$ ~23,000$
Upper bound adding volatility ~58,000$ ~36,500$
Lower bound subtracting volatility ~9,100$ ~14,500$

*23000 is obtained with 1st January as a starting price (around 16500$) times (1.0090^365)=~1.39   |  16500*1.39=22900, just change 365 with the number of days you prefer for a different forecast.

What happened in 2022? 

A year ago, I predicted an upper boundary of $199,000 using full volatility and about $123,000 using half of historical volatility, these two targets were calculated based on the opening price on January 1, 2022, which was around $48,000. The calculated support levels were $48,000 and $29,800. 
It has been a negative year as we have never gone beyond the first calculated support level of $48,000, indicating a general weakness, while some support at $29,800 was seen during the year until May, after which even that level was abandoned and broken to the downside.
It should be noted that the first support at $48,000 acted as resistance during the spring when Bitcoin was unable to break through this support from below. When yearly supports act as resistance, it is evident that the market is weak.

Conclusions

I do not have any clear long-term trading recommendations for you this year as the Federal Reserve’s change in monetary policy to combat inflation has reduced the liquidity necessary to support strong Bitcoin prices. It may be wise to wait for a potential change in policy, but I expect Bitcoin prices to gradually decline towards calculated support levels for next year ($9,100 and $14,500). Based on my analysis using monthly bands based on Kaufman’s average, the most probable support area is around $12,000 (as shown in the chart section below), inside the 9,000$-14,000$ support price range for 2023.

If market volatility increases significantly above historical average, it may be a good opportunity to engage in a short-term trade by buying Bitcoin within the price range of $6,500 to $9,000. The value of $6,500 has been calculated using twice the historical volatility of Bitcoin as a reference and I consider it a rock solid support level in the event of a catastrophic market downturn.

If there is an improvement without making new lows, it is evident to me that resistances should be sought around $36,000, where we have the first resistance level computed with entropic methods and where there is also the monthly Kama average.
It is very unlikely to break $58,000 during 2023.

Unfortunately, this year I do not have a clear idea, I remain pessimistic however looking for a target at $12,000 where eventually buy something should I notice an improvement in market liquidity.

I’m at your disposal for any questions; see you at the next update and Happy New Year!

Charts

Bitcoin’s cumulative volatility as expected is dropping every year and is stabilizing towards a value that is still a bit high compared to other traditional assets (stocks, gold, bonds range from 0.01 to 0.03) but the very high average returns of btc compensate the high volatility. The values represent the root mean square of logarithmic returns of bitcoin daily data.
The second lower monthly kama average price band will probably slowly reach the $12,000 level during the 2023.
I expect to find similarities between the levels calculated in the Kama indicator i use and those used with this approach, the formulas for calculating the bands in my indicator are the same as those used in this update.

Quick Update and general considerations

On By CryptoAdvisorIn Other3 Comments

In the last update in May 2022, I hypothesized that Bitcoin would not remain above the annual forecast support, set at 29,800 dollars. At the time, I also hypothesized a possible test down to the first support of my monthly Kama average, at around 22,000 dollars, a test that then materialized.

The problem is that bitcoin did not hold that support and the next support, in May, was around 14300 dollars. The monthly kama average that I use, unfortunately, is no longer as flat as it was in May but is starting to take a negative slope. For those who have been following me for a while, you should know that I measure the intensity of the trend by looking at the ratio between volatility and the intensity of the signal that the kama average measures.
This value has not yet exceeded the threshold value of 0.30 that decrees the existence of an ongoing trend, but we are very close. So at the moment a downward trend is not yet confirmed on the monthly chart of Bitcoin but it is close. A similar situation occurred in the distant July-August 2015, at the time then Bitcoin made a bottom in the following months before starting to rise again towards the 2017 bubble.

Some things have changed since 2015, Bitcoin is no longer so small in terms of market capitalization, it has attracted institutional investors who follow different logic from the investors who owned Bitcoin in 2015.
Today, those who invest in Bitcoin, in my opinion, are still influenced by traditional markets with their logic and especially by the monetary policies of central banks that are no longer as accommodating as they have been during most of Bitcoin’s existence.
A liquidity crisis, triggered by central banks in recent months, can only harm Bitcoin or at least slow it down and that is exactly what we are seeing in these months. I believe that the current scenario will continue at least until the first part of 2023 and this will probably lead Bitcoin to test the 14300 $ support of the May 2022 support, a support that today unfortunately has fallen to 12300 $ becasue of a slight downwards drifting phenomenon of the supports of my monthly average.

A New Approach to Price Bitcoin

In the comments section of my previous post “Will it work?”, I responded to some followers by introducing a model that I am developing in an attempt to correctly price Bitcoin. I believe this model is an improvement over the well-known stock to flow model by Mr. PlanB, a well-known person on Twitter.

Instead of considering only the money supply, which as the sole input of a bitcoin pricing model has already been shown to be insufficient, I consider the Bitcoin difficulty derived from the network’s hashing speed. I have therefore tried to combine two important characteristics of Bitcoin in a single model: the money supply and its difficulty or network effect/hashing speed.

I have also considered a 20% error band that contains what I believe is the correct price of bitcoin, so -20% on the fair price and +20% on the calculated fair price. As of today, this fair price value is around $15,000, with a minimum of $12,000 and a maximum of $18,000. As you can see, at the moment bitcoin is within this price range, so it can be considered properly priced without significant excesses.

You will have noticed similarities between the two approaches, the one of the monthly averages plus deviation bands known to you and this experimental model that I recently made, both aim at $12000 as the last support, below which one could talk about a real bear market for bitcoin. If you want to make a deal, bitcoin should be bought when it is below its fair price, so try to buy as close as possible to the price range of $12 to $15 thousand that could be reached in the first half of next year.

I wanted to share with you these things that I am working on. As always, feel free to comment with your thoughts on the matter.

BTCUSD, Daily Chart, Bitcoin FairPrice Model version 1.0

This is an experimental model, it shouldn’t be used alone for proper investment decision.