They say that history doesn’t repeat; it rhymes. Seldom will you find a domain that takes this insight more seriously than trading. After all, the very point of visualising price action is to be able to compare what’s taking place now to what came before.
To Hold or to Sell?
The strength of the recent crypto sell-off has inspired a great deal of historical price analysis in the community. Holders old and new are attempting to understand how much longer the current bull cycle has to go. Across the world, on social media and in person, discussions about whether the move is topping out are taking place, and questions are being raised as to whether it’s prudent to start thinking about booking profits so as to not be caught out like so many were in 2018. Back then, the strength of the bounce that followed the top had investors expecting new higher-highs. Many held on even after these failed to materialise and had to watch the value of their portfolios declining for the better part of two years.
To a casual onlooker, there’s no debate; all you have is paper profits until you cash out, so why risk losing the impressive gains that have already been made late-2019 and to date? The reason it’s not as simple for many crypto investors is that crypto tends to confound all expectations on the way up. In previous bull markets, traders have tended to cash out far too early, thinking the uptrend almost over, and ended up missing out on the bulk of the parabolic move. This is particularly true of retail investors, for whom early returns are so meaningful, often life-changing. This leads to a dynamic where all but the coolest of retail heads are able to let their profits run.
Those who do hold on are often guilty of a different – though related – sin. Retail traders also tend to hold on far too long. They’re slow in adjusting their outlook when the tide turns and frequently find themselves holding the bag. It’s these issues that people are wrestling with at the moment, particularly those with memories of previous cycles who may be sensing echoes in the price action and broader coverage of the space.
So, where do we find ourselves, both technically and fundamentally, and do these things even matter in a crypto bull market? It’s a cruel irony that, in trading, your tools start to break down precisely when you need them most. This isn’t a phenomenon that’s unique to crypto; we’ve seen similar behaviour in US equities over the past year. The frothier a market gets, the less fundamentals matter. You can throw a dart at a list of names and pick a winner. But technicals are also confounded in strongly trending markets. Overbought levels and divergences mean less than they should when animal spirits are raging. Sell signals are often followed by new highs.
So, while we may not be able to answer the question we started with, we can take stock of where we are in relation to the previous bull market. Fundamentally, 2017 and 2021 are two completely different worlds. Not only has bitcoin gone on a journey of institutional acceptance and adoption, but many of the events of past year have strengthened the case for an option against the traditional financial system. In the broader crypto space, 2017 and 2021 are night and day. The technology is rapidly maturing. From provably secure and decentralised proof of stake mechanisms to experiments in decentralised finance, things that were pie in the sky in 2017 are ready and working today. Yield in crypto is another big story, with even the most conservative APYs difficult to find in the traditional world.
On the technical side, we also don’t appear to have come close to matching the excesses of 2016-2018. During that period, bitcoin surged by over 4000%. Even if you take your measure from the lows of last March to its recent highs, bitcoin has rallied less than 1400%. Recently, commentators have been referencing the Mayer Multiple, an indicator that tracks the multiple of bitcoin’s current price over its 200-day moving average. It peaked at 3.58 in December of 2017 but is currently only at 1.49. Then, we come to the 20-week moving average, which bitcoin’s price has respected as support throughout previous bull markets. As of the time of writing, bitcoin’s price has yet to even return to this moving average, let alone test it.
The truth is that no one knows where this thing is going, and positive fundamentals can still mean extreme drawdowns and pullbacks. The Amazons of this world sell off just as readily as the Pets.coms do when the crash comes.
As for technicals, they have a strange way of showing you what you’re already looking for until it’s too late. For example, the other side of the evidence presented above is that every bitcoin bull run has been proportionally smaller than the last one. 2016-2018 was smaller than 2011-2013, and it’s likely that this time will be no different. It’s much easier to move a market cap in the hundreds of millions than one that’s in the hundreds of billions. The same is true of the Mayer Multiple; each subsequent bull market’s peak level has been lower than the previous one. And the 20-week moving average, though harder to debunk, faces the same criticism as all moving averages do. It only tells you what has already happened, and so has limited predictive power. Bitcoin had recently broken above its 20-week moving average last year before the crash we saw in March.
If the past year has taught us anything, it’s that even the best-laid plans can go awry. It’s the black swans that we need to protect against the most. And since these, by their very nature, can’t be foreseen, it’s always wise to take some profit off the table when things are going your way. This should never be seen as a bad decision, even if the price continues its upward trajectory. There’s no need to be all-or-nothing, an important part of trading is learning how to adjust your exposure as things change. Selling into strength rather than capitulating on weakness, is always the preferable option. It’s a hedge against an undesirable outcome and a future option of re-accumulation. Of course, all this is easier said than done, but sometimes it’s useful to have it spelled out.
by Giles Coghlan, Chief Currency Analyst, HYCM