December 17th, 2017 marked the highest recorded price for bitcoin of approximately $19,783. This was a period of hope, joy, and excitement for the cryptocurrency and blockchain community. To the moon was the sentiment of many investors and then out of nowhere, the seemingly impossible happened.
The price began to tumble…
One Week Earlier…
During the run-up of the BTC price rally in December 2017, an important and often underestimated event took place – the Chicago Board Options Exchange (CBOE) began offering Bitcoin futures at 5 pm CT on December 10, 2017.
A week later the price of Bitcoin plummeted and the price has yet to recover.
It’s Just Conspiracy, Right?
Is it possible there is a relationship between the BTC price drop and trading of BTC Futures? To answer this, we need to first understand what futures are and how they work.
The Origins of the Futures Markets
Our earliest written records of futures trading come from Aristotle in his book Politics. Here he tells the story of the philosopher Thales who was confident in his ability to predict future olive crop yields.
Thales was so confident in his predictive abilities that when he believed the harvest would be good, he made agreements with local olive-press owners to give him exclusive use of their olive press at a future date in exchange for an agreed-upon price today.
Since the olive-press owners were willing to hedge a guaranteed amount to be paid verse the possibility of a poor (or unknown) yield they agreed to his terms.
Today, the futures market works very similarly as described in Aristotle’s Politics. Many farmers and commodity producers still rely on the futures market to hedge against unknown future commodity prices.
As long as there has been a futures market, there have been people trying to profit from it. One such popular and an age-old technique and suspected to be used in BTC futures is known as “banging the close”.
As defined by the US Commodity Trading Commission:
Banging the Close:
A manipulative or disruptive trading practice whereby a trader buys or sells a large number of futures contracts during the closing period of a futures contract (that is, the period during which the futures settlement price is determined) in order to benefit an even larger position in an option, swap, or other derivative that is cash settled based on the futures settlement price on that day.
To use Bitcoin as an example, an investor could potentially manipulate the market price for Bitcoin (temporarily) just at closing time to benefit from a larger position (profit).
Bitcoin is a perfect vehicle for this type of manipulation because it is easily susceptible to high market volatility, physiological manipulation best of all for the perpetrators its anonymous so conspirators are difficult if not impossible to track.
The Future for Cryptocurrency
Lest we forget Bitcoin is just 10 years old and every day, continually it has been under attack. It’s the largest online financial target with a market capitalization of almost $200 billion dollars and is and will always be a target for manipulation.
There is no doubt various degrees and types of manipulation and attacks taking place, both within the BTC futures market and in the regular markets.
Everyday Bitcoin and is being attacked and every day this technology fights back. Whether the futures market lay blame to the sharp tumble in price from the December 2018 high or whether it’s from a litany of other attacks — what is important it that Bitcoin has yet to lose a single battle.
In these markets, there will be manipulators. And there will be manipulators manipulating the manipulators. There are already automated trading bots. Many of these bots are now trading against themselves. Trading has become so fast and sophisticated that now AI is competing with the trading bots and with other versions of AI.
Bitcoin may be knocked down and it’s growth suppressed, but only for so long. When its bounces back, it will bounce back fast. This can be seen in the recent rise in from $3,500 to $10,000 over a period of a few short months.
As the market reenters its growth phase, will you be well-positioned to profit from it?
We are now at the point where most people in the developed world are familiar with the word “Bitcoin”. With the increase in awareness of Bitcoin and cryptocurrencies, so has the investment in this space.
Cryptocurrency trading has taken the world by storm and with it many people are jumping in en masse in an attempt to profit from the incredible returns these types of investments offer.
However, to survive and thrive in this space requires a special set of skills to be learned and mastered — that is, Mastering the Psychological Element of Cryptocurrency Trading.
It’s 100% Psychological
It’s said that over 90% of Bitcoin trades are purely speculative. Although this may be a gross underestimate, it’s quite certain the percentage of speculative trades for altcoins (all cryptocurrencies other than Bitcoin) is even much higher.
What this means is price volatility can be largely determined by the manipulation of our basic human emotions — This is especially true for the new blood entering this space.
Terms like FOMO (Fear Of Missing Out) and FUD (Fear, Uncertainty and Doubt) circulate in all corners of this online world.
To be able to succeed in cryptocurrency, you will need to be able to control the psychological elements of this game.
It’s the Art of War
If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle. — Sun Tzu, The Art of War
Before even making the decision to trade, there are many forces at play directed at you to sway your judgement and form an opinion. Consider them your enemy if you will — their intent is to capture your attention and if lucky, sway your judgement to their benefit.
There are altruistic players in this game looking to develop greater equality for the public at large with their open source and community based platforms.
There are also unmerciful players in this game looking to line their own (online) wallets, such as Pump and Dump groups that feed off greed and the chance to make a quick buck, or trolls (often paid reps) offering their unsolicited opinion on whats hot and the next big thing.
Regardless, whether the forces at play are with you or against you, they are there to accomplish one thing — redirect your attention and reform your opinion.
How to Win The Game
Firstly, it’s important to think of this as a game. Investing in cryptocurrency for all intensive purposes is completely virtual. It’s intangible. It’s nothing more than a publicly agreed-upon register of values.
Furthermore, many of the projects, especially ICO’s are nothing more than an idea and intention to make the concept a reality.
If we can agree cryptocurrency investing is a game, then it’s a strategy game. It’s a strategy game that requires you to put the emotion of trading aside and to critically assess the information you have at your fingertips.
This process is called critical thinking and to win this game, you need to develop this skill.
It’s the Most Valuable Skill You Can Learn
Cryptocurrency trading offers you the opportunity to develop and hone your critical thinking skills — not only a highly valuable skill on it’s own, but critical to your ability to be successful in this realm.
Critical thinking is the ability to form a clear and rational opinion about what to do or believe. It’s the ability to engage in reflective and independent thought based on the information you have at hand.
Thinking critically allows you to:
Determine the most probable future outcomes for a series of events
Understand and identify patterns and logical connections between events
Detect inconsistencies, abnormalities and mistakes in reasoning
Use creatively, logic and a methodology to solve problems
Critical thinking isn’t simply collecting data.
It’s about sorting and analyzing the information, looking for patterns, inconsistencies, connections between data points and the ability to predict a probable future outcome for a series of events.
Most importantly, critical thinking also gives you the superpower to push away irrational or otherwise emotionally motivated actions. It will help you steer clear of those basic human emotions that can have a negative influence on our judgement and long-term success in this realm.
Mastering the Game
There is an art and science to being successful in cryptocurrency trading. Sure there is an element of luck, but long-term success in this market is largely a result of mastering our own internal skills.
Mastering the psychological element of cryptocurrency trading is about improving your critical thinking skills. It’s about the ability to think clearly and rationally given any circumstance.
Regardless whether the market is up or down, it’s about having the nerves to see your plan through and not succumb to those more basic human emotions.
Equally important, critical thinking is necessary for self-reflection.
In order for us to live more meaningful lives, we need to have the ability to reflect and be aligned with our own values and beliefs (as well as our investment choices and decisions).
Critical thinking is a life tool; to be sharpened,
honed and cared for by a master-craftsman (that would be you).
Here are lessons I had to learn the hard (expensive) way that I wish someone had told me before I started investing in cryptocurrency.
After two years alternating between full-time and part-time cryptocurrency trading, here are the most important lessons I had to learn the hard way:
1: Have a Strategy
How many times have you heard “I hear Bitcoin is a good investment, should I buy it?”
These conversations starters are doomed to become failed investments.
It’s not because I don’t think it’s a good investment, but rather there is much more to the subject of investing than whether something is a good deal.
You need an enter and exit strategy. You need to know your expectations on growth, timing, risk and amount of capital you are willing to invest. These are all important questions that should be clearly answered before making your first cryptocurrency investment.
I’ve seen too many people chase the latest fad, pumped coin or simply follow someone else’s advice without confirmation. Sometimes these people luck out on a few good trades. But in the long-term, they all fail.
Before jumping into cryptocurrency investing, decide what you are willing to risk/invest. Decide the amount of time or energy you are willing to put towards this activity, and the time-frame for the investment and your exit strategy.
2: Decide “What Type of Investor Are You?”
This is where your personality type comes in. Cryptocurrency trading is far more psychological than most people are aware and it’s important to be the type of investor which best fits your personality type — otherwise it may end in disaster.
There are three main groupings of cryptocurrency investors:
These are the guys watching the markets 24/7, continually researching and typically buying and selling multiple times during the day. It’s high intensity, high risk and high adrenaline. Most day traders I know are young and pumped full of caffeine. If this is not for you, don’t even think of day trading.
Similar to day traders but with less intensity. Investments are generally held for longer periods of time from a few days up-to a few weeks. A few buys and sells are done during the course of the week and this can be done on a part-time basis. Most traders I know are swing traders.
These are the guys that buy and hold. It’s the guy to who bought Bitcoin 7 years ago and still holding onto it. It’s those people who decided to allocate 1% of their diversified portfolio into cryptocurrency. Long-term investors aren’t interested or phased by the intraday, daily or weekly trends. They view their investment over periods of years. These are buy and hold type of investments.
Decide on the outset what type of trader you are.
Cryptocurrency is a temptress and she will try her best to move you away from your trading “personality”. Don’t allow this to happen as it will end in disaster. Stick to the type of trading which best suits you personal type as it will help clarify which trades you will consider and the ones you won’t.
3: Don’t Buy Shit Coins
Another way of saying this is only buy coins/tokens which have intrinsic value. Don’t buys some random coin because it’s going up and you’re friend told you.
Sadly, most cryptocurrencies are shit coins. With over 1,500 different cryptocurrencies actively traded and another 1,000 new coins to enter the market this year, the majority of these coins can be classified as “shit coins”.
So…what is not a “shit coin”? A cryptocurrency which has intrinsic value.
Cryptocurrencies with Intrinsic value, that is they have a specific and well defined market need, they have a large and supportive community, they have a team of developers with a roadmap and proven ability to get things done. And probably most importantly — they have financial backing.
Those cryptocurrencies which already have VC (external) funding have already been vetted by experts who do company evaluations for a living (Actually, this is a great “research short-cut” to find the next up and coming cryptocurrency — follow what VC firms are buying).
The more money in the pot to pay employees and for marketing, the greater the chance of success for that project.
There is an exception to this rule — Day traders buy shit coins all the time. Which is one of the reasons day trading is so risky. However, my advice still stands — Don’t buy shit coins. They will leave you high and dry.
4: Do Your Own Research
Sadly, FUD (Fear, Uncertainty and Doubt) and FOMO (Fear of Missing Out) rule the cryptocurrency market. Trading cryptocurrency is a psychological game you need to master. Learn to make your own opinions. There are no oracles in this market. Experts only offer educated guesses.
If you don’t do your own research, then you are relying on the research of others. In my personal experience, my best investments where those cryptocurrencies I found on my own — before they become popular and others were talking about it.
Learning to do your own research is an important life skill and one that can pay very well if you get it right. It’s about developing your critical skills, pattern recognition, and balancing your emotional and logical faculties.
Doing your own research and forming your own opinions will help you battle the psychological components of this game much better.
5: Start Small
In the last two years on two separate occasions I had taken a $100 investment and turned it into over $5,000 over a period of a few months.
It is possible.
Start small. Starting small allows you to make mistakes that aren’t costly. Your success is rewarded with more capital to invest. The better your skills, the more profitable your trades. The more profitable your trades, the more you are able to trade with.
Starting small also means almost anyone from anywhere in the world can participate in this marketplace. You don’t need large sums of money to enjoy cryptocurrency trading. In fact, I’d recommend against it — especially if you are first starting out.
Think of it this way. The market rewards you for your skills. The better your skills, the most profitable your trades and more capital you have to work with.
There is a learning curve and money can’t buy you this education.
This education is only gained in the trenches by doing. In the beginning you are investing in yourself — your skills as a trader. You’ll know when your skills as a trader improve, because the capital you will have at your disposal to invest in will increase commensurate with your ability.
Also, when you start small and build your capital within the cryptocurrency market, there is an important psychological component that is worth noting.
Most of us have money issues. If you start thinking of your trades as “this investment is equivalent to 3 months of full-time work” it will certainly impact your ability to make good trades.
When you start small, it becomes a game. The most risk is your $100. You can always cash out a percentage of your earnings as reward for your success. Just keep the process going.
These are lessons which I paid a lot in money, frustration and time to learn. Investing in cryptocurrency can be fun, exiting and extremely financially rewarding if it’s approached in the right way.
Cryptocurrency trading can also cause financial ruin if you don’t approach it the right way.
For all those traders, or those looking to trade, have fun, enjoy the journey, and please heed this advice.
So, you bought into Bitcoin (or other cryptocurrency) and over the last few months you’ve been asking yourself…
— “What’s going on?”
And more importantly, “When is Bitcoin going to go back up?”
I’d like to offer a perspective to shed light onto this situation. Of course these views are my own and by no means to be construed as financial advice — however if you are looking for some rhyme or reason for the recent dip in BTC price and the forecast for 2018 — hear me out.
Starting with the events which have taken place over the last 6 months having the greatest impact on the cryptocurrency marketplace:
In the last 6 months (here’s what happened):
Multiple sovereign nations have either threatened to ban or otherwise legislate cryptocurrency in one way or another (China, South Korea, USA, India).
New amendments to the US Tax Act now treat Cryptocurrency as property and cryptocurrency many types of crypto transactions as taxable events.
Visa/Mastercard Network shutdown all Crypto based Debit Cards.
Multiple Sovereign Nations are increasing their regulations relating to ICO’s (USA, China, South Korea).
Many Sovereign Nations have increased rules and regulations regarding KYO standards for exchanges within their borders.
What’s important to note is each of these variables has reduced the flow through between the traditional financial (FIAT) monetary system and cryptocurrency markets.
Restricting Access to FIAT:
Cryptocurrency (and it’s ability to grow) is directly related to the ability of money to flow freely between the existing financial markets (FIAT) and the digital currency market.
And right now the channels used for the free flow of money into and out of cryptocurrency markets are constricted.
Its more difficult for money to FLOW INTO cryptocurrency. Many ICO’s no longer accept US citizens and exchanges in many countries are being asked to increase their KYC requirements.
Its more difficult for money to FLOW OUT OF cryptocurrency. The Visa/MasterCard network (having over 38 million merchants worldwide) made cryptocurrency Debit Cards an easy way for individuals to spend their cryptocurrency — Until the network pulled support for all cryptocurrency debit card services.
It’s more difficult to Trade Cryptocurrency. The US is the first country to treat cryptocurrency as property and subject to tax on each transaction causing a significant drop in cryptocurrency trading by US citizens.
And with the growing uncertainty over Tether (USDT) many investors have one of two choices — hold their funds in an uncertain, not audited US pegged cryptocurrency or simple exit the market. Many investors chose to exit.
So…When will Bitcoin go back Up?
Over the long-term it can be said that Organic Growth of bitcoin is still strong as awareness about the cryptocurrency grows. And the media attention in 2017 certainly helped that. However, Organic growth won’t take us quickly to the heights that were seen just a few months ago.
For Bitcoin and the cryptocurrency markets to increase in price as it did back in November and December the same factors which lead to its fall would need to be corrected — greater throughput between crypto and fiat will need to happen. Here is the good news — mechanisms are already in place to make this happen. And it’s happening by way of ICO’s.
On the Horizon…
There are some amazing new ICO’s being developed in areas that will increase the throughput between the existing financial markets.
Asset Backed Cryptocurrencies: This new breed of cryptocurrencies will bring with it potentially hundreds of millions of dollars of (real) assets into the marketplace.
Decentralized Exchanges (DEX): Since these exchanges don’t physically reside anywhere, they will likely avoid jurisdictional regulations.
P2P Exchange Networks: Increasingly Bitcoin ATM’s, and new ICO’s offering Peer-to-Peer exchange networks, offering more opportunities for buyers and sellers or cryptocurrency worldwide.
In 2017, Bitcoin & Cryptocurrency were introduced to the public at large. Not a bad year considering all. However, tighter government regulation and the restricting the flow in and out of the cryptocurrency market has caused the market to contract considerably.
Bitcoin price and the cryptocurrency market at large is in a state of transformation and many new ICO’s will be entering the market providing solutions to the biggest problems. It’s foreseeable the rise in Bitcoin and market capitalization will start to increase when many of these new projects go live — mid to late 2018. With a view to what’s in the pipeline, mid to late 2018 is looking to be another stellar year.
A leading indicator is measurable activity that changes before the price of a cryptocurrency starts to follow a particular pattern or trend.
The weather could be said to be a leading indicator for the agricultural sector. If bad weather knocks out the crops for the season, weather can be used as an indicator for the higher future price of such produce (assuming all things remain equal; demand remains constant while supply is reduced).
Do such leading indicators exist for the cryptocurrency market?
Cryptocurrency (at the moment) is almost purely speculative in nature for many cryptocurrencies. If “interest” in a particular cryptocurrency is equated with Demand, then it stands to reason that global “interest” in a particular cryptocurrency can be related to it’s market price.
The higher the “interest”, the higher the demand, the higher the price of that specific cryptocurrency. Conversely, the opposite should be true — the less “interest” in a specific cryptocurrency, the lower the relative price.
To test this theory, we are going to take a look at the price of specific cryptocurrencies over the last 12 months and compare the “interest” in that cryptocurency using a a tool called Google Trends.
How it Works:
Using Bitcoin as an example, the last 12 month of price history will be taken from Trading View , which looks similar to this:
The Google Trends chart for Bitcoin will also be added, which looks similar to this:
These charts are then combined to see if any patterns emerge.
In the case of Bitcoin the combined two charts would look like this:
The Green Line represents the USD price of Bitcoin while the Blue Line represents Google Trends “Interest” for the search term “Bitcoin”.
Can you See any Patterns?
In the case of Bitcoin (above) there is a very close relationship between the “interest” in the cryptocurrency and it’s price. It could even be said there is a slight lag of a few days between “Interest” and “Price”.
As you will notice, there is a drop in “interest” in Bitcoin even though the price was still rallying higher. Maybe this is just an exception… Are there other examples to support this theory?
Let’s look at a few others:
In the example of Verge, there does seem to be a direct correlation between interest in the coin and it’s price.
Again, we see a very solid relationship between the interest in Digibyte and it’s price.
A relationship can also be seen with KuCoin
The same can be said for IOTA.
There are many other cryptocurrencies where this trend holds true.
Why Does this Work?
Most cryptocurrencies are speculative in nature. The more speculators (investors) searching for the cryptocurrency, the higher the probability of more investment in that cryptocurrency. The higher the demand (interest in the cryptocurrency) the higher the price. And the converse is also true.
However, this approach doesn’t work for all cryptocurrencies. There are many exceptions which don’t fit into this model. One such example is EOS.
Impressively, the interest in EOS is a consistent ~75% interest over the last year. According to our observations above, it would be assumed the price would continue to increase — but the actual price doesn’t reflect this.
So why doesn’t EOS follow this trend?
One likely reason is EOS is not seen by investors necessarily as a speculative investment — It’s a blockchain development platform for the development of dapps where it’s value is determined by the apps built on-top of it.
Or, maybe this is a lagging indicator illustrating that EOS is undervalued and supporting future price growth. For the case of EOS, this will be an interesting outlier to follow in the upcoming months.
Many cryptocurrencies which are highly speculative in nature have a tendency to follow the pattern described above.
Even though this correlation doesn’t apply to all cryptocurrencies it does offer insight and a simple and easy assessment tool for investors when determining the probability for future price movements within the cryptocurrency space; both for individual cryptocurrencies and for the market as a whole.