Long Term Update: 2023 Outlook with entropic methods

I will be busy in the coming days, so the yearly update for 2023 is being released early.

Every year i post an outlook using entropic methods explained in the technical section of this blog. Here you can find the 2015, 2016, 2017, 2018, 2019, 2020, 2021, and 2022 forecast update, where you can find more information about this approach.

Updated values for bitcoin (in brackets values of 2022) using daily data since August 2010 (from now on I will use only BITSTAMP data, as today there are not many differences between major Bitcoin exchanges.).

   BTC/USD
Growth Factor G 1.00090 (1.00130)
Shannon Probability P (see this as entropy) 0.5214 (0.5254)
Root mean square RMS (see this as volatility) 0.049 (0.049)

The entropy values of Bitcoin versus the USD have remained relatively consistent in 2022. The Growth Factor (G) has decreased slightly to 1.00090% compounded daily or 139% per year, which is less than the 168% seen one year ago. The optimal fraction of your total wealth to invest in Bitcoin has slightly decreased to 4.3% (~0.5214*2=1.0428 – 1 = 0.0428 or 4.3%, which is still roundable to 5% like last year).
The volatility of Bitcoin, unlike in previous years, has not decreased this year if we consider the average value from the beginning of the historical series, around August 2010 and it appears that for now, it remains stable at a fairly high value when compared to other assets such as gold, stocks, bonds, and forex currencies.
Despite a challenging year in 2022, the BTCUSD growth factor is still much better than traditional markets, except for the Shannon Probability, which still matches that of the US stock market (around 0.52). This means that on average, out of 100 days, an asset goes up 52 days and down for 48 days. 

 2023 Price forecast  Full Historical Volatility  Half Historical Volatility
Forecast using only G* ~23,000$ ~23,000$
Upper bound adding volatility ~58,000$ ~36,500$
Lower bound subtracting volatility ~9,100$ ~14,500$

*23000 is obtained with 1st January as a starting price (around 16500$) times (1.0090^365)=~1.39   |  16500*1.39=22900, just change 365 with the number of days you prefer for a different forecast.

What happened in 2022? 

A year ago, I predicted an upper boundary of $199,000 using full volatility and about $123,000 using half of historical volatility, these two targets were calculated based on the opening price on January 1, 2022, which was around $48,000. The calculated support levels were $48,000 and $29,800. 
It has been a negative year as we have never gone beyond the first calculated support level of $48,000, indicating a general weakness, while some support at $29,800 was seen during the year until May, after which even that level was abandoned and broken to the downside.
It should be noted that the first support at $48,000 acted as resistance during the spring when Bitcoin was unable to break through this support from below. When yearly supports act as resistance, it is evident that the market is weak.

Conclusions

I do not have any clear long-term trading recommendations for you this year as the Federal Reserve’s change in monetary policy to combat inflation has reduced the liquidity necessary to support strong Bitcoin prices. It may be wise to wait for a potential change in policy, but I expect Bitcoin prices to gradually decline towards calculated support levels for next year ($9,100 and $14,500). Based on my analysis using monthly bands based on Kaufman’s average, the most probable support area is around $12,000 (as shown in the chart section below), inside the 9,000$-14,000$ support price range for 2023.

If market volatility increases significantly above historical average, it may be a good opportunity to engage in a short-term trade by buying Bitcoin within the price range of $6,500 to $9,000. The value of $6,500 has been calculated using twice the historical volatility of Bitcoin as a reference and I consider it a rock solid support level in the event of a catastrophic market downturn.

If there is an improvement without making new lows, it is evident to me that resistances should be sought around $36,000, where we have the first resistance level computed with entropic methods and where there is also the monthly Kama average.
It is very unlikely to break $58,000 during 2023.

Unfortunately, this year I do not have a clear idea, I remain pessimistic however looking for a target at $12,000 where eventually buy something should I notice an improvement in market liquidity.

I’m at your disposal for any questions; see you at the next update and Happy New Year!

Charts

Bitcoin’s cumulative volatility as expected is dropping every year and is stabilizing towards a value that is still a bit high compared to other traditional assets (stocks, gold, bonds range from 0.01 to 0.03) but the very high average returns of btc compensate the high volatility. The values represent the root mean square of logarithmic returns of bitcoin daily data.
The second lower monthly kama average price band will probably slowly reach the $12,000 level during the 2023.
I expect to find similarities between the levels calculated in the Kama indicator i use and those used with this approach, the formulas for calculating the bands in my indicator are the same as those used in this update.

Quick Update and general considerations

In the last update in May 2022, I hypothesized that Bitcoin would not remain above the annual forecast support, set at 29,800 dollars. At the time, I also hypothesized a possible test down to the first support of my monthly Kama average, at around 22,000 dollars, a test that then materialized.

The problem is that bitcoin did not hold that support and the next support, in May, was around 14300 dollars. The monthly kama average that I use, unfortunately, is no longer as flat as it was in May but is starting to take a negative slope. For those who have been following me for a while, you should know that I measure the intensity of the trend by looking at the ratio between volatility and the intensity of the signal that the kama average measures.
This value has not yet exceeded the threshold value of 0.30 that decrees the existence of an ongoing trend, but we are very close. So at the moment a downward trend is not yet confirmed on the monthly chart of Bitcoin but it is close. A similar situation occurred in the distant July-August 2015, at the time then Bitcoin made a bottom in the following months before starting to rise again towards the 2017 bubble.

Some things have changed since 2015, Bitcoin is no longer so small in terms of market capitalization, it has attracted institutional investors who follow different logic from the investors who owned Bitcoin in 2015.
Today, those who invest in Bitcoin, in my opinion, are still influenced by traditional markets with their logic and especially by the monetary policies of central banks that are no longer as accommodating as they have been during most of Bitcoin’s existence.
A liquidity crisis, triggered by central banks in recent months, can only harm Bitcoin or at least slow it down and that is exactly what we are seeing in these months. I believe that the current scenario will continue at least until the first part of 2023 and this will probably lead Bitcoin to test the 14300 $ support of the May 2022 support, a support that today unfortunately has fallen to 12300 $ becasue of a slight downwards drifting phenomenon of the supports of my monthly average.

A New Approach to Price Bitcoin

In the comments section of my previous post “Will it work?”, I responded to some followers by introducing a model that I am developing in an attempt to correctly price Bitcoin. I believe this model is an improvement over the well-known stock to flow model by Mr. PlanB, a well-known person on Twitter.

Instead of considering only the money supply, which as the sole input of a bitcoin pricing model has already been shown to be insufficient, I consider the Bitcoin difficulty derived from the network’s hashing speed. I have therefore tried to combine two important characteristics of Bitcoin in a single model: the money supply and its difficulty or network effect/hashing speed.

I have also considered a 20% error band that contains what I believe is the correct price of bitcoin, so -20% on the fair price and +20% on the calculated fair price. As of today, this fair price value is around $15,000, with a minimum of $12,000 and a maximum of $18,000. As you can see, at the moment bitcoin is within this price range, so it can be considered properly priced without significant excesses.

You will have noticed similarities between the two approaches, the one of the monthly averages plus deviation bands known to you and this experimental model that I recently made, both aim at $12000 as the last support, below which one could talk about a real bear market for bitcoin. If you want to make a deal, bitcoin should be bought when it is below its fair price, so try to buy as close as possible to the price range of $12 to $15 thousand that could be reached in the first half of next year.

I wanted to share with you these things that I am working on. As always, feel free to comment with your thoughts on the matter.

BTCUSD, Daily Chart, Bitcoin FairPrice Model version 1.0

This is an experimental model, it shouldn’t be used alone for proper investment decision.

Long Term Update: Will it work?

Since I published the annual forecast last January ’22, BTCUSD has already tested the lower limit of the forecast twice, at around $30,000.
I don’t know whether to interpret this behaviour as a sign of weakness or not. What is certain is that if the TOP of this halving cycle has been made it is very likely to test at least the 1st lower band of my monthly Kama average (22,700$).
Let’s see in detail the levels that I consider interesting to observe.

BTCUSD Monthly chart since 2017 Top

I would interpret as a signal of possible weakness a breach of the $29,800 level, certainly we need to consider how long bitcoin will remain below that level.
In times of temporary high volatility it would not be so serious a short permanence there; however a prolonged stay below this level would have long term bearish implications. What does this mean? It means that the games are over for this cycle and we will have to wait for the next halving of 2024, so I would say 2025, to see a new all-time high. This conclusion I guess doesn’t surprise you, by now the 4-year halving cycle of bitcoin is well known to the public.

The question is whether the price will stop at the first level of the Kama band or not. I think so, around $22,000 the support will be very strong and there will be buyers.
I exclude a severe test at the next support, around $14,000, also because bitcoin has never moved below the high of the previous halving cycle, in this case the last one was at around $19,800 in Dec. 2017; furthermore even during the corona crash the price stopped on the first lower band (at that time $3,800)
I wonder what needs to happen to see bitcoin test the second price band at $14k, if any of you have ideas please come forward 🙂

Personally, I will be a buyer again around the first support of the Kama average, around $22,000. Should an extreme level of volatility occur, I will increase the position at $14,000 with a doubled position size (1 unit at 22k$ and 2 units at 14k$) because i’ve to capitalize when volatility is at extreme levels without any fear.
See you at the next update.

Long Term Update: 2022 Outlook with entropic methods

Every year i post an outlook using entropic methods explained in the technical section of this blog. Here you can find the 2015, 2016, 2017,  2018, 2019, 2020 and 2021 forecast update, where you can find more information about this approach.

Updated values for bitcoin (in brackets values of last year) using daily data since August 2010 (average data of 4 main exchanges when possible).

   BTC/USD
Growth Factor G 1.00130 (1.00104)
Shannon Probability P (see this as entropy) 0.5254 (0.5232)
Root mean square RMS (see this as volatility) 0.049 (0.055)

Bitcoin’s entropic values versus the Usd improved during 2021,  the Growth Factor (G) grow to 1.00130% compounded daily or 160% yearly, higher then 1y ago. The optimal fraction of your total wealth to invest in bitcoin rised to 5.1%  (~0.5254*2=1.051 – 1 = 0.051 or 5.1% roundable to 5%).
Volatility continues to drop year after year and that’s normal as bitcoin gets bigger and bigger so less prone to volatility.
The BTCUSD growth factor is much better then conventional markets except the Shannon Probability that still match the US Stock Markets (around 0.522); it means that out of 100 days an asset goes up 52 days and down for 48 days, on average. I am not surprised of this because the same agents trading in conventional markets are more or less the same as those trading in the crypto market, so they have the same entropy or mental disorder.

 2022 Price forecast  Full Historical Volatility  Half Historical Volatility
Forecast using only G* ~77,000$ ~77,000$
Upper bound adding volatility ~199,000$ ~123,000$
Lower bound subtracting volatility ~29,800$ ~48,000$

*77000 is obtained with 1st January as a starting price (around 48000$) times (1.00130^365)=~1.6   |  48000*1.6=~77000, just change 365 with the number of days you prefer for a different forecast.

What happened in 2021? 

A year ago, I predicted a top of $121,000 using full volatility and about $72,000 using half of historical volatility, the latter being more likely to be hit and this is exactly what happened considering some room of error.
This market has made a low in June at $28,750, 10% above the $25,000 forecasted support level, again using half historical volatility.
During 2022 I recommend to hold your position till the upper boundary of the next cycle defined by monthly kama upper resistance bands ($80,000-$130,000) in accordance with the forecasted value of $123,000 using entropy methods and half historial volatility. 

Conclusions

As I said in the previous October update, I continue to believe that conditions in this market have changed since the other halving cycles which usually saw a Top around 19 months after the halving date. I expect a consolidation in 2022 with a slightly bullish sideways phase.
A very strong support zone remains the $30k to $48k price range that might be fine tuned during the year using Kama monthly price bands.
Should there be an excess of volatility I would advise you to take advantage of the event with some profit-taking between 120 and 200 thousand dollars; if volatility push the price down to the support area of $30,000-$48,000 do the opposite, buy:)

I’m at your disposal for any questions; see you at the next update and Happy New Year!

Charts

Bitcoin’s cumulative volatility as expected is dropping every year and is stabilizing towards a value that is still a bit high compared to other traditional assets (stocks, gold, bonds range from 0.01 to 0.03) but the very high average returns of btc compensate the high volatility. The values represent the root mean square of logarithmic returns of bitcoin daily data.
Monthly Chart BTCUSD with 2022 Price Forecast using entropic method.
The first lower monthly kama average will probably slowly reach the $30,000 level during the 2022.
I expect to find similarities between the levels calculated in the Kama indicator i use and those used with this approach, the formulas for calculating the bands in my indicator are the same as those used in this update.

Long Term Update: Will it work?

In the last update I had pointed out that it was crucial to exceed the monthly kama average (at that time around 40k usd), so bitcoin did and after a very strong bottom in July it resumed the uptrend on the monthly chart. Why a strong bottom? Because it was far above the support price zone defined by the lower bands.

At this point it is obvious that it will do a new top under the push of the ten-year old uptrend, after all bitcoin never entered a prolonged bear market since its inception.
For quite some time now, thanks to the price bands, I have identified the price zone where the next top will happen, that is between 80 and 130 thousand dollars. This is the minimum target IF, and I emphasise IF, the monthly average kama will remain flat.
If you look at the attached chart you will notice that the monthly kama average is no longer flat but is going upwards, albeit slightly.

BTCUSD Monthly Chart

This fact should be kept in mind because the greater the upward slope of the average the lower the possibility that the bitcoin will stop in the resistance zone, if an asset is trending strongly you should forget the price bands.
You may have noticed in the chart this aspect of the 19 months between the halving of the block and the market high, there are already two times that this market did a top within 19 months from the halving and in this cycle the expiry date is next December, the question then arises, will it work?

I think not, the market is never so symmetrical, we are talking about non-linear dynamics here that almost never lead to a strong symmetry or repetitiveness of price patterns, so I expect it to do something different this time and there are two possibilities, or that the maximum has already been done or that bitcoin will make another even beyond 19 months from halving, I am inclined to the latter possibility with the important implication that it might go above the price resistance zone.

How to translate this into your trading operativity? For the more risk averse you could evaluate a scaling down of the position at a point of your choice in the range 80k-130k usd. For all others you could use a dynamic stop loss like “chandelier exit” to try to exploit as much as possible the current uptrend. Search for “chandelier exit” or “chandelier stop” on tradingview, you will find many versions of this indicator.

Long Term Update: Critical Point

It is always better to look, as I always say, at larger time frames to understand how to build a winning operating strategy. I invite you first to look at this monthly chart of the BTCUSD, before commenting it.

BTCUSD Monthly Chart with Kama Roof/Floor price zones

We are clearly compressed in a price range well defined by the monthly average that defines the equilibrium point of this halving cycle (2020-2024) and an intermediate level with reduced volatility (around $28,000).

A Failure to move and to stay above the monthly Kama average would be bearish in my opinion and it would clearly be followed by a decline to the support zone of this halving cycle, between $11 and $18K.

With a confirmed break of the monthly average above $40,000 then the view would change and bitcoin would return to a position of strength that should bring it towards the resistance zone located between $80 and $130,000, in accordance with what I wrote in January in my “2021 outlook with entropic methods” where upper bound level was 121,000$

Bitcoin and the top of the previous cycle rule

Because of this rule i’m very skeptic to see bitcoin at 18,000$ or even lower inside the support price zone. Bitcoin in its history never tested the price level of the top of the previous halving cycle and if 29,000$ bottom is confirmed this rule will not be broken (29,000$ is above 2017 Top at around 20,000$).

What would a bottom in this cycle below 20,000$ imply? Well, it would mean that bitcoin’s long-term trend is slowing down and we would probably have to wait for the next halving cycle, after 2024, to see a Top above the current one at $64,000. Thus, as i wrote in this post title, we are at a critical point in time to understand what scenario bitcoin will go into.

The Big Picture

BTCUSD Monthly Chart since first halving

Here you can see what I said before, the Top of a halving cycle is always lower than the bottom of the next cycle, I interpret this as a strong bullish signal of the fundamental trend of bitcoin.

To conclude many of you are probably asking why the hell i sold below 29,000$ if there was an intermediate support slightly lower, well once i define a strategy with a trailing profit order i prefer to avoid to continously change it to accomodate what the market does, i had already moved the trailing profit order from 35,000$ down to 29,000$ to contain the volatility of bitcoin and it worked for several weeks then some bad luck damaged me, however this is all part of trading and i’m not upset at all.

Short Term Update: Still bearish

We are flat, usually it happens so the market finds a strong point (where the indicator of efficiency of kama average reaches values around 0.80-0.85) and stops, at that point it can go in lateral or bounce noticeably.
In most cases we enter in a lateral phase which is now defined by the usual bands that I use (see chart below).

BTCUSD – Daily Chart

What i’d like to see is:

  • Some consolidation above daily kama average, >38,000$
  • A first breakout of the first resistance band at 41,000$
  • A test of the 2nd band at 44,000$
  • Some healthy retracement back to 41,000$ or so
  • Final break-out above 44,000$

This could be a good recipe for a trend reversal on the daily chart.

38,500$ is not only the daily kama average but also the 2nd support band on the hourly chart, i’d like to see bitcoin above it these days during a possible accumulation before to break above 41,000$.

Fix in your head that as long as we stay below $44,000 (by the way it is also the monthly Kama average) my view remains bearish.

Long Term Update: Top is probably in for this cycle.

I think at this point it is very likely that the TOP of this cycle has been done and to see a next top we will have to wait the next cycle of 2024-2028 with a possible top expected in 2025.
One could say that Bitcoin could repeat what we saw in 2013 with two successive highs, one in March and the other in December but I think it is unlikely that history will always repeat itself with the same patterns.
I don’t think it is negative for bitcoin another 4 years of consolidation spent between the floor price and kama average as we have seen in previous cycles.

As you can see in the below monthly chart the new floor price zone is around 12k-20k usd, will bitcoin go there? I don’t know, honestly I think we can expect something different this time as the intermediate level of low volatility highlighted in the chart may work holding bitcoin above 28k usd.

BTCUSD – Monthly chart

First test is to see if this intermediate level will work or not, if not then a capitulation might occur around 20k usd that it was also the top (static support now) of the previous cycle (December 2017).

My doubts also include the fact that I was expecting a much stronger top than this one done at around 64000 dollars, if confirmed it would be a weak top for this cycle and I would interpret this as a slowdown of the long term trend; this is also understandable, as an asset grows in size it also becomes slower and more stable with lower and lower volatility and less and less intense bubbles.

For the current trade the trailing profit at $29k remains unchanged, if caught I think I will buy back again if support at 28k will holds in the coming weeks and/or months and eventually i’ll buy again inside the floor price of this cycle.

Crash Update: How many Periods to use?

I’m writing this update to do a clarification to the analysis posted the other day, as I had said the support range of the price bands that I use had contracted a bit giving me an area of support of 36-42 thousand dollars, why this? Because I use 60 periods to calculate volatility and more than 60 periods or weeks have passed since the minimum of March 2020 where there was a correction similar to this one, therefore the volatility peak recorded in that bottom of last year is no longer included in the calculation.

Hence the question “How many period to use?” is legitimate, in some cases is smart to fine tune the indicator parameters to better accommodate what is happening (an increase of volatility).

For those who use my indicator with tradingview can verify what i’m saying by themselves by increasing the setting “rms periods” from 60 to 70 for example.

Having said that, the support zone is thus corrected to around 31-40 thousand dollars and I would say that for now it has worked quite well, this means that we are still in the limits and that a trend reversal on the weekly chart is not yet confirmed, so far we are just seeing volatility at work.

We will have to wait until the end of this week and next week to better evaluate the ongoing correction to check if bitcoin price will remain above 31000$ or not.

BTCUSD Weekly Chart

Long Term Update: No more Tesla.

“…..on the daily chart where there is strong support but again it is a question of which timeframe will prevail and at the moment I would bet on the weekly chart, nonetheless there might be a minor rebounce from here….”

Last Update April 23, ’21

The minor rebound happened, market remained sideways around the daily average and came back down because of an accident (a tesla went off the road)
Let’s broaden the view with a weekly chart.

BTCUSD Weekly Chart – Below Kama Efficiency Ratio

Everything that has been happening since February 2021 which is the the slowdown of the trend on the weekly chart was expected and is the result of a careful observation of the volatility / trend ratio, two elements that characterize the average that I use (Kama)
I expect a further slowdown of the trend until mid-June when Bitcoin will be completely flat, from there on a new trend will emerge on the weekly chart; the future of bitcoin will be decided there should this new incoming trend be positive or negative (i guess positive).
A good idea could be to buy in the next week if bitcoin will test the weekly support zone in the 36,000-42,000 $ price zone, this market is lateral therefore I expect that it will not fall under 36000 dollars.

I think in July, I hypothesize, some liquidity may return to bitcoin from altcoins, also because the bitcoin market share chart (BTC.D on tradingview) has a nice spike in the kama efficiency ratio on the weekly chart (bottom might be near).
If a new trend is expected on the weekly chart for July let’s say, who could fuel this new trend? A return of liquidity from altcoins to bitcoin itself.

As usual if you have any doubts leave a comment, it is well appreciated.

Long Term Update: Weekly average broken down!

I left you on March 31 saying that bitcoin would probably go up with less intensity, that’s what it did by making a new top around Coinbase’s Nasdaq listing event.
It can happen that such events that catalyze the attention of the entire community can mark what I call “buying climax” remember that the main feature of such an event is when you run out of demand around a highly anticipated news or event like the Coinbase listing.
The situation on the weekly chart has remained unchanged, I’ve been telling you for two months that the Kama efficiency ratio is high and needs to go down and that’s what it keeps doing, today we got to about 0.59 and I think it will continue to go down until the next sideways phase.
This sideways phase should take place between 30K and 40K usd as shown in the chart below but my bet is that 40k usd support will work.

BTCUSD – Weekly Chart

As I told you, the kama efficiency ratio is going down but it’s going to take weeks to get below the 0.30 threshold,so it will presumably take a while before bitcoin will resume the uptrend.
I conclude by commenting on the daily chart where there is strong support but again it is a question of which timeframe will prevail and at the moment I would bet on the weekly chart, nonetheless there might be a minor rebounce from here.

BTCUSD daily chart