The objective of this article is to be an educational support for everyone who wishes not to be caught off guard by the market. We will present you with tools and indicators to use during the euphoric phase of the bull run, to help you navigate this crucial period. This article follows a first blog post on the various strategies to use to properly prepare for your bull run, available here How to Manage Your Bull Run Effectively. It also builds on the public Masterclass from Summit Research, usually private, whose replay is available here.
As the name suggests, an indicator is just that – an indicator. There are several points to keep in mind:
• accept that the indicator may not work in all market configurations;
• accept that you won’t be able to buy at the bottom and sell at the top, even using them;
• avoid using too many indicators that could ultimately prevent you from making a decision;
• despite using indicators, stick to your plan!
A well-known tool that received a lot of criticism during the last bull run. However, it might be useful to keep an eye on it to understand the long-term growth trend of Bitcoin’s price. The “Bitcoin Power Law Corridor” is used to visualise and predict the long-term growth trend of Bitcoin’s price. This indicator is based on a power law that links Bitcoin’s price to its time of existence. It is a mathematical formula that models the relationship between Bitcoin’s price and the time elapsed since its creation.
Bitcoin’s value is assumed to increase following an exponential (or power) curve over time. This type of relationship suggests that Bitcoin’s price grows at an accelerating rate over time, which is consistent with the perception of technological growth and adoption that also tend to follow exponential patterns.
This also implies that the longer Bitcoin exists, the more it could gain in value, according to the specific adjustments and conditions of this power law.
How is the corridor drawn?
• The corridor is drawn on a logarithmic scale chart, which allows better visualisation of price movements across varying orders of magnitude.
• The central line of the corridor follows a power law relationship, where Bitcoin’s price is related to time. The specific parameters of this relationship are adjusted to fit historical Bitcoin price data.
• Additional lines are drawn around the main line to create a “corridor”. These lines often represent multiples or fractions of the value predicted by the central power law, indicating relative levels of overbought and oversold conditions.
Interpretation of the curves
• The central line (green or red) represents the average growth trend of Bitcoin’s price, calculated by the power law. It is an estimate of the ‘fair’ value of Bitcoin based on its historical behaviour.
• The green and purple corridor lines serve as guides to identify when the price is exceptionally high or low relative to the historical trend. They can be used to signal buying or selling opportunities.
Practical use
Investors and analysts can use this indicator to assess the current price position relative to historical norms of “overbought” or “oversold” conditions. Based on where the price is within the corridor, they can make decisions on buying or selling Bitcoin, aiming to anticipate corrections based on historical movements.
Even though it has often faced criticism, this indicator is particularly valued for its ability to provide a long-term perspective on Bitcoin’s valuation, placing it within a growth trend that smooths out short-term fluctuations.
The “Mayer Multiple” is an indicator used in Bitcoin price analysis, based on the relationship between Bitcoin’s current price and its 200-day moving average.
Functioning of the Mayer Multiple
• The Mayer Multiple is calculated by dividing the current price of Bitcoin by its 200-day moving average. For example, if the current price of Bitcoin is $30,000 and the 200-day moving average is $15,000, the Mayer Multiple would be 2.
• A high Mayer Multiple suggests that Bitcoin is overvalued relative to its long-term moving average, potentially indicating a market overheat. Conversely, a low multiple could indicate that Bitcoin is undervalued.
Interpretation
• The blue curve represents the Mayer Multiple over time. This curve shows how the current price compares to the 200-day moving average at any given moment.
• The red horizontal line represents the “threshold,” a specific Mayer Multiple level, in this case, 2.4. Historically, when the Mayer Multiple exceeds this threshold, it has often coincided with market peaks, suggesting that Bitcoin was significantly overvalued at those times.
How to Use the Indicator
• Above the 2.4 threshold: If the blue curve exceeds the red line (2.4), it could signal that the market is in an overbought state and that it might be a good time to take profits or reconsider one’s exposure to Bitcoin.
• Below the 2.4 threshold: If the multiple is below 2.4, it suggests that Bitcoin’s price might be in a more normal or undervalued zone relative to its long-term historical trend.
The Mayer Multiple is useful for investors seeking to understand when the Bitcoin market might be overvalued or undervalued relative to its historical trends. It is a tool for assessing the timing of purchases and sales based on historical volatility and relative price levels, but it should be used in conjunction with other analyses and indicators to make informed decisions.
The stock-to-flow is commonly used to evaluate scarcity and potentially predict the future price of Bitcoin. The S2F model is used to assess Bitcoin’s scarcity and is based on the idea that the rarer a resource, the more valuable it is. This model suggests that Bitcoin’s price could increase over time as the production of new Bitcoins decreases (especially after each halving), thereby increasing its scarcity.
Components of the Stock-to-Flow (S2F) Chart
1. Blue curve (BTC Price): Represents the historical evolution of Bitcoin’s price in USD.
2. Orange line (Stock/Flow 365d average): This line results from the Stock-to-Flow model, which divides the total amount of Bitcoin in circulation (stock) by the amount of new Bitcoins generated annually through mining (flow). This average is calculated over 365 days.
3. Red line (Model variance): Indicates the variance between the actual Bitcoin price and the price predicted by the S2F model.
4. Dotted vertical lines (Halving dates): These lines represent the dates of Bitcoin halving events, where the block reward for mining is halved, thereby reducing the flow.
Implications for Buying or Selling Bitcoin
• The S2F model can provide an estimate of Bitcoin’s future price based on its scarcity. If Bitcoin’s current price is well below the value predicted by the S2F model, it could indicate a good time to buy, anticipating a long-term increase in value.
• Halving events reduce the production of new Bitcoins and potentially influence the price upwards. By buying before a halving, you might benefit from a price increase due to this supply reduction.
• The variance line (red) shows the gap between the current price and the price predicted by the model. A significant gap may suggest an overvaluation or undervaluation of Bitcoin according to this model.
Although popular, the S2F model is regularly critiqued and should be used with caution. It relies on the assumption that scarcity is the sole factor influencing Bitcoin’s price, excluding other economic, regulatory, technological, or market factors. It is advisable to combine this model with other technical analyses, fundamental analyses, and market considerations to make informed investment decisions.
The “Bitcoin: Pi Cycle Top & Bottom Indicator” is a popular indicator used to predict peaks and troughs in Bitcoin’s price cycle. Here are the details of the different components of the chart:
1. Bitcoin price curve (BTC Price) — This is the black curve that shows Bitcoin’s price evolution over time.
2. Green curve (Price 350DMA x 2) — This line represents twice the 350-day moving average (350DMA) of Bitcoin’s price. It is calculated by taking the average of Bitcoin’s prices over the past 350 days and multiplying this average by two.
3. Orange curve (Price 111DMA) — This line is the 111-day moving average (111DMA) of Bitcoin’s price, calculated by taking the average of prices over the past 111 days.
Green and Red Zones
• Green zone: Represents market conditions where the oscillator drops below a specific threshold, indicating that the market is oversold. Historically, this suggests a good buying opportunity as prices might be relatively low compared to normal.
• Red zone: Indicates that the oscillator has risen above a certain threshold, signalling an overbought market. This serves as an alert for relatively high prices, potentially preceding a correction or a downward reversal.
The purple curve you see bouncing between these two zones is an oscillator. It is used to identify overbought or oversold conditions. Based on mathematical formulas that process price data, this oscillator fluctuates between the green and red zones, helping traders identify potential trend changes or reversal points in the market.
Interpretation
When each curve crosses the price curve:
• Orange curve (111DMA) crossing the price curve: When the 111-day moving average crosses above the price, it indicates a bullish market, while a downward cross indicates a bearish market. This curve supports the price curve throughout the bull run. Its crossing with the price indicates a market reversal.
• Green curve (350DMA x 2) crossing the price curve: This type of cross is not frequently discussed as a specific indicator in traditional literature on this indicator, but theoretically, a downward cross indicates the market is moving away from overvaluation. We can observe that when it crosses the price curve upwards, Bitcoin’s price enters a euphoric phase. When it crosses downwards, it indicates the start of a bear market.
When the green and orange curves cross: Historically, the crossings of these two lines have been indicators of significant peaks in Bitcoin’s price. When the 111-day moving average crosses above the 350-day moving average multiplied by two, it has often coincided with a market peak.
When the purple curve enters the red zone, it may indicate that the price is at a high level and could be about to decrease, suggesting a potential cycle top. When the purple curve enters the green zone, it may signal that the price is low and could start to increase, suggesting a potential cycle bottom.
The Pi Cycle Top Indicator is used to identify potential moments when the Bitcoin market is overheating and thus more likely to see a price reversal. When the two moving averages cross, it is often interpreted as a signal that the market could reach a top and that a correction might follow. By monitoring these crosses in conjunction with other market indicators and fundamental analyses, investors can try to predict trend changes and adjust their strategies accordingly.
The MVRV Z-Score for Bitcoin is a financial indicator used to determine if Bitcoin is overvalued or undervalued. It combines several key elements, which I will describe, including the relationship between the orange curve (MVRV) and Bitcoin’s price (represented by the black line).
• Black line (market cap): This line shows the evolution of Bitcoin’s market capitalisation.
• Blue line (realised cap): The blue curve indicates the “realised cap,” the “true capitalisation.” This concept differs from traditional market capitalisation, which is simply the product of Bitcoin’s current price by the total number of bitcoins in circulation.
Realised capitalisation is calculated by summing the value of each bitcoin at the price at which it was last purchased, rather than the current price. For each bitcoin in circulation, the price at its last transaction (i.e., when it was last moved from one address to another) is multiplied by the number of bitcoins involved in that transaction. The average of all these individual values gives the realised capitalisation. This removes the short-term market sentiment and provides a more accurate indication of reality.
• Yellow line (Z-Score): The Z-Score is the relationship between market capitalisation and realised capitalisation to identify periods when Bitcoin is overvalued or undervalued relative to its “realised value.”
Overvaluation and Undervaluation Zones
Red zone: This zone indicates periods when Bitcoin was likely overvalued. Historically, these periods have often preceded significant corrections.
Green zone: In contrast to the red zone, this zone is often used to signal that the ratio is relatively low, which may indicate that Bitcoin’s market capitalisation is close to or below the realised capitalisation. This can be interpreted as a period of market undervaluation, where Bitcoin’s price is considered low relative to the “realised value” of bitcoins.
Interpretation
• The Z-Score helps to identify if Bitcoin’s price is high or low relative to its “realised value”. A high Z-Score suggests that Bitcoin’s current price is well above the value at which most current holders bought their bitcoins, potentially indicating a market overvaluation.
• To avoid a trap encountered during the last bull run, adopting a reverse DCA strategy would have been advantageous. If you had waited for the Z-Score to reach the red zone to sell, you might have missed the opportunity, as the Z-Score did not stay there long. The advantage of reverse DCA is that it allows you to gradually secure profits as the market rises. Depending on your risk tolerance and investment profile, you might start selling when the Z-Score reaches values like 2, 4, or 6, thereby capturing gains during the rise without waiting for an uncertain peak. By selling at 6, for example, you do not sell at the top, but you are not far from it.
The Z-Score serves as an indicator for investors seeking to understand Bitcoin’s price cycles and identify potential overbought or oversold moments based on the realised value compared to the current market capitalisation. These tools can thus be used to evaluate buying or selling opportunities by anticipating market movements based on historical trends.
Having indicators and tools is essential for keeping a cool head and better managing risks during a bull run. They allow you to be more rational and avoid emotional decisions. The goal is not just to make more money, but above all to preserve the latent added value of your investments. Until midnight on Saturday, 1st June 2024, an exclusive offer is available for you to become a subscriber to Summit Research at €49/month instead of €99, with €49 offered in Summit tokens. Find out more here.
