I always say that charts are a great way to predict the past. Surprisingly this can make them very useful. They cannot predict the unpredictable but—as we know—the past heavily influences the future because signal and noise are nested and when you can measure the underlying signal, it is a guide for what is up next. Perfect markets are random, but few markets are perfect especially in these days of markets ‘curated’ by regulators with their liquidity rigging.
People are not only fooled by randomness, but they are also often oblivious to signal as well. You might be acting randomly but you are nonetheless in your car at roughly the same time going to work in roughly the same place. Even though you parked your car randomly in a different bay when you arrived and adjusted your chair a bit from how you were sat the day before, the thrust of your day is non-random. Signal and noise are rolled up together and signal is normally a big element of what cycles through everything making things quite predictable. Of course, you might break down on the way to the office, be called home for an emergency or have a ‘moment’ and go fishing instead but in the main the signal is a pretty high component of your wave function.
It’s the same with stock charts, and that’s why moving averages are so popular. The less efficient the market the bigger the signal. I judge crypto as a pretty inefficient market, and it certainly has been. It has therefore lent itself quite well to my technical analysis. You can see the noise in the bitcoin chart and you can see the fractals in it, which are in themselves a result of partially non-random events.
Fractals are a bit of a mystery to folks, but you can imagine them this way: get a sheet of copper and a ball hammer; hammer away at the sheet as much as you like. Fairly soon you have a fractal pattern on the sheet of copper that is very recognizable and kind of repetitive in a hard to predict way. This is because the pattern is created by roughly the same action, acting on roughly the same metal substrate by roughly the same hammer face with roughly the same force within a bounded area. Nature is full of these fractal patterns because rain falls in roughly the same way on roughly the same mountain and roughly the same waves wash up on roughly the same shore and roughly the same wind blows on roughly the same fluffy cloud and so on. In the markets it is roughly the same people, making roughly the same decisions on roughly… you get the idea. This injects fractals into charts. “Roughly” is the random element, the rest is the signal.
Of course, a big ol’ meteor strike will wreck the lot, markets and all. However, left unmolested these processes produce patterns that reveal the processes themselves.
So here is bitcoin’s chart.
I’ve drawn some speculative lines on. I’ve been extrapolating this $12,000 to $13,000 level for a very long time—one way or another. The track record of my scribbling is all here on Forbes to see and it’s not too shoddy. If you care to go back here on Forbes, you’ll see me call crypto up from the lows of 2020 and call it back down to below $20,000 again.
In a way, I am comfortable with the $20,000 level for bitcoin and am just about resisting the temptation to start a program of slow accumulation at these prices. As a bitcoin and crypto believer, I see that long-term prices will be multiples of current levels, so buying now and watching the price halve is no biggie; the losses will wash out later. However, I am resisting, I’m not that sanguine of an investor. I prefer to stay away for now with a strong intuition that there is another leg down.
Then there is a huge metaphorical asteroid out there that could turn things upside down in crypto and that is the Ether
My take is that we appear to be in a bear market recovery and the final bear market bottom has not yet established nor has there been a satisfactory moment of capitulation. For uncertain investors, it has to be a game of wait and see, but for traders there is still plenty of noise and volatility to trade and they have no reason to stop their risky endeavors.
I’ll leave the fun to the traders and wait.