by Dan Clarke & Jesse Knutson, Institutional Sales
DISCLAIMER; This post and its contents should in no way be considered investment advice.
If it looks like a dog & barks like a dog it’s probably a dog. This seems to be a reasonable way to describe the recent price action in Bitcoin which appears to exhibit both the price & volume characteristics that you would expect with a capitulation in an historical context, whilst recognising that confirmation of this, due to the lack of any reliable & commonly recognisable measures, will only be recognised in hindsight.
Wisdom of the Crowd Doesn’t Apply at Peaks & Troughs?
The only bottom that you will consistently be able to pick is your own! The reality is that the majority of people will not reliably predict anything. The polls didn’t prepare the markets for Brexit (As highlighted by the Guardian “Of 168 polls…fewer than a third (55 in all) predicted a leave vote”. The polls didn’t prepare the markets for Trump (In 2016, the major prediction sites ALL predicted a Clinton victory). It’s unlikely the polls taken at face value will let you know when the Bitcoin bottom is finally in.
On that front here is a tweet from Alistair Milne who ran a poll over this last weekend titled “Where will the Bitcoin carnage end”. So far there is a good sample of 15200~ votes. 82%~ believe it will go to $3000~ or lower & 54% believe it will go to $2500 or below. Call me a sceptic but I just don’t see 82%~ correctly calling the bottom in Bitcoin.
As taken from Investopedia article “In a 2015 Bloomberg View article, wealth manager and columnist Barry Ritholtz argued that prediction and futures markets, unlike markets for goods and services, lack the wisdom of crowds because they do not have a large or diverse pool of participants. He points out that prediction markets failed spectacularly in trying to guess the outcomes of events such as the Greek referendum, the Michael Jackson trial, and the 2004 Iowa primary. The individuals trying to predict the outcomes of these events were simply guessing based on public polling data and did not have any special individual or collective knowledge”. Sound familiar?!
What does Capitulation Look Like?
Twitter seems full of people adamant that we haven’t seen capitulation. Having lived & worked through the capitulation in equity markets in 2001~ & 2009~ and several others in between, I have to say this feels a lot like capitulation. Whilst we often consider capitulation to be accompanied by sharp price declines on heavy volume, because there is no industry standard for measuring either of these, it’s difficult to determine in real time with any degree of confidence.
Much of the skepticism that capitulation has actually taken place is with regards to volume & the apparent belief that the sell-off hasn’t been accompanied with a much needed volume spike. However the reality is that because volume in Bitcoin & digital assets more broadly is hugely fragmented across hundreds of exchanges, where it’s very difficult to verify the data as necessarily being real volume, it’s even more difficult to spot & proclaim capitulation than it would be on a centralised exchange like the S&P.
Have We Seen Signs of Price Capitulation in Bitcoin? YES.
So if we look at the 30Day ROC (Rate of Change) in Bitcoin we recently hit -40%~. In this recent down cycle, we saw a similar level back at the trough in January 2018 after which we enjoyed a very brief 40%~ rally & then again in April 2018 after which we enjoyed a 50%~ rally over several weeks. So far in this down cycle we have only breached -40%~ once, hitting -58%~ at the depths of the February pullback after which we had a 92%~ rally.
Prior to 2018 when was the last time Bitcoin breached -40% 30Day ROC? It was in the 2014–2015 bear market & the -40% ROC was breached only twice. First in April 2014 after which the price enjoyed an 80%~ rally over a couple of months (Not dissimilar to the 93%~ rally we got off the ROC lows being hit in Feb 2018) & again in January 2015 bottom, after which we had a 75% rally over a couple of months & whilst the Bitcoin price bottom was tested again in August of 2016, it ultimately held & so began the 2015–2018 bull market.
Have we Seen Signs of Volume in Capitulation? PROBABLY.
Simply eye balling the Bitcoin chart with volume over the past 12months, We can see that recent volumes haven’t been sustainably this large since the February & April sell down. Given their is no reliable or commonly accepted measure of what capitulation volume should look like, I think its fair to say this is “probably” a sign of volume capitulation.
One way of looking at volume across different cycles is to look at 5Day/20Day volumes so that we can get ranges of volume spikes that can be compared across periods with widely different absolute $ volumes. If we chart this against the Bitcoin price we can gauge the degree to which we believe we have had volume capitulation. We took this data from coinmarketcap.com.
The first chart below shows the 2013–2015 price cycle. As you can see the double bottom in 2014/2015 was on a 5Day/20Day volume % range of 125% (Aug 2015 bottom) to 165% (Dec 2014 bottom).
Now if we look at the current cycle below, we can see that the 5Day/20Day % has recently hit 125%~ and eye balling this its clear this is one of the largest volume sell-offs in this cycle. We cannot say for sure that this is capitulative volume, however it’s the largest volume sell-off so far in this down cycle. In addition what this shows is that all the other large volume spikes on the 5Day/20Day in this down cycle had been associated with rallies not troughs until this latest move. This should again support the idea that we have just seen is capitulative like volumes.
The final way I decided to look at this was to look at data for the last 2000 days and screened for times where ROC was ≤ -35% & 5D/20D volume ≥ 110% i.e. a price capitulation on an increase in volume. Over 2000 days there were only 3 occurrences of this happening, 2 of which were concentrated around a single point in time. You can see these on the chart below. One of the occurrences is right now over this last weekend. The other 2 were back in 2015 (The second chart shows this occurrence in 2015 against price more clearly). This data also supports the idea that the recent sell-off is capitulation in terms of both price & volume.
So lastly what did price do short term after these 3 occasions over the last 2000 days where ROC was ≤ -35% & Volume 5D/20D ≥ 110%? The table below shows the results.
DISCLAIMER; This post and its contents should in no way be considered investment advice. We may individually hold positions in some of the assets we discuss. Any projections, conclusions, analysis, views are to be considered hypothetical & for informational purposes only & not meant as recommendations for investment. Anyone considering an investment in crypto should only invest what they can afford to lose. You alone are responsible for evaluating the risks & merits of our content.