Long Term Update

BTCUSD Monthly Chart KAMA Average 5 periods and deviation lines.

Since the last update on February 13 there are not many new developments. The monthly KAMA average is flat, which allows us to calculate fairly reliable levels of support and resistance. As you can see nothing interesting happened with the BTCUSD cross that remains inside the supports and resistance levels (yellow lines).

I have added a new indicator that calculates supports and resistances using as a starting point the close of the previous month (with the idea to forecast next month support/resistance levels), in this case the close of February at about $ 10300. I have used the last 50 months, just over 4 years from the bear market’s lowest point in 2015, to calculate volatility.

The drop we have seen in recent days has reached an intermediate level, -1.5 standard deviations, so I can say that there has not been a level of extreme volatility but not even normal.

My opinion is that the bitcoin will continue to remain for most of the year within the levels calculated with the KAMA (yellow) and therefore remains a good opportunity to buy the price area from 4000 to 5500 dollars, while it is to be evaluated a reduction of any bullish position should the BTCUSD go above 25 thousand dollars.

I also give you some short term indications for the next days, the first resistance is $9500, you might see a Top not exceeding $9500 before the BTCUSD resumes its descent. A break above $10000 would mean that at least in the short term the bearish trend is over.

 

ITA Version here

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Long Term Update: Bottom Done Yes or No?

On 18 January 2018, I wrote that the bottom was probably done but I hinted that at the break of the same I would have closed my long term position, unfortunately there was a subsequent very strong selling activity after a weak reaction from the support of the weekly chart (at about 9500$). In these cases it is useful to scale the time frame to the next one (from weekly to monthly), so i applied the KAMA average and its deviation lines to the monthly graph instead of applying them to the weekly graph.
The resulting graph is this at the moment and the market has reacted strongly from this support area.

monthly chart btcusd
BTCUSD Monthly Chart – Kama and deviation lines

You can see that the first deviation  line has hold the price from further lows at the end of the 2014-2015 bearish market, the same negative deviation line reported to date is at about $ 5300 and the market, for now, has done a bottom at $ 5900. I’ts difficult for me to say if the bearish market started in December 2017 is over, I remain convinced that we will hardly see stable prices under $3900 and that the support area from $3900 to $5300 will be very strong for this year.

If during ther year the trend of the Kama average becomes bearish from flat we will have a confirmation that a down trend, even on the monthly chart, has been established and this would undermine a little the validity of the support area indicated in the chart.
For now I think that the market is still stronger than the 2014-2015 period and that any medium-term correction should be above the indicated support area.

Italian version here.

 

Long Term Update: 2018 Outlook with entropic methods

Every beginning of a new year i post an outlook using entropic methods explained in the technical section of this blog. Here you can find the 2015, 2016 and 2017 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 of 4 exchanges when possible).

 BTC/USD
Growth Factor G 1.0028 (1.0007)
Shannon Probability P 0.5384 (0.519)
Root mean square RMS (see this as volatility) 0.059 (0.045 )

Bitcoin’s entropic values versus the Usd strongly improved in 2017 but volatility increased a bit, despite this the Growth Factor (G) increased up to 1.0028% (remember that volatility is detrimental to the Growth Factor) compounded daily or 280% yearly up from 30% of 1y ago. Also the optimal fraction of your capital to invest in bitcoin improved in 2017 with a 7.7% instead of 6.4% of 1y ago.

 2018 Price forecast  Full volatility  Half volatility
Forecast using only G* ~38700$ ~38700$
Upper bound adding volatility ~121000$ ~68000$
Lower bound subtracting volatility ~12300$ ~21800$

*38700 is obtained with today price (around 13800$) times (1.0028^365)=~2.77
13800*2.77=38740, just change 365 with the number of days you prefer for a different forecast.

It’s interesting to notice that with reduced volatility the support level is above the actual quote of XBTUSD (13800$ at the moment i’m writing) because the growth factor (G) is very high and is skewing everything to the upside. If volatility stays low the uptrend should push bitcoin above 22k USD during the year without too much effort, it’s a scenario i prefer instead of wild price swings.

What went wrong in 2017?

A year ago, I forecasted a top of $2900, reached in July 2017 with an intermediate Top well ahead of the end of the year. I tried to double the volatility factor (rms) to see the next level after a reader asked me about the possibility that bitcoin was in a bubble above 2900$. The next level was around 6000$, again this new level has been broken at the end of October.
The last 2 months have been crazy and the explanation is a huge change in shift in this market happened in March 2017 (with altcoins literally exploding) that basically erased the reliability of the January 2017 forecast. I think that this year forecast should be more accurate compared to last year.

Conclusions

For this year i think that i’ll consider the support/resistance levels obtained with a full volatility value with the result to have for the whole 2018 a good probability to stay inside the 12300$-121000$ price zone.
At the same time i think that at the end of a strong buying climax period, if any, it will be wise to reduce your bitcoin investment if the price goes above 60k-70k USD.

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

Quantitative Analysis of Altcoins, part III

In part I and II I did a quantitative analysis on altcoins and possible strategies on how to capitalize on their weakness compared to bitcoin.

In Part III we will see how to allocate a portfolio starting with Fiat currencies.

In the table below you will find cryptos with relative gains (G) and volatility (RMS) against the dollar using all the historical data available, as data source was mainly used  poloniex and bittrex exchanges, for bitcoin has been used Bitstamp.

In red the cryptocurrencies with negative Gain against the USD.

Cryptocurrency  Gain (G) Volatility (RMS)
Bitcoin 1.0045 0.0796
Ethereum 1.0033 0.0863
Ethereum Classic 1.0031 0.076
BCash 1.0029 0.1535
Eos 1.0024 0.1355
Dash 1.0013 0.0894
Monero 1.0007 0.0781
Stellar Lumens 1.0005 0.1207
Ripple 1.0004 0.1115
Iota 0.9984 0.127
Qtum 0.9979 0.1224
Litecoin 0.9976 0.095
Bitcoin Gold 0.9966 0.0983
Next 0.9954 0.11
Zetacash 0.9902 0.1104

It’s pretty obvious that i’ll not consider any crypto with negative Gain and Bitcoin is clearly the winner with the best Gain and low volatility compared to the rest. I exclude also all the crypto with positive Gain but with high volatility because the main objective is to allocate a portfolio with the lowest possible volatility.

The remaining crypto are:

  1. Bitcoin
  2. Ethereum
  3. Ethereum Classic
  4. Dash
  5. Monero

Ideally it should be allocated the same amount of money on each asset but to compute the fraction of your capital to put on each asset i use the same formula seen in Part I & II.

F = 2P - 1

Where F is the optimal fraction of your capital to wage in a single trade and P the persistence or Shannon Probability, concepts already explained in Part I & II.

Cryptocurrency  Persistence (P) Fraction of your capital to wage (F)
Bitcoin 0.55 10%
Ethereum 0.5441 9%
Ethereum Classic 0.5317 6%
Dash 0.535 7%
Monero 0.5286 6%

Thanks to the formula F=2P-1 I know how much to wage on each crypto for a total of around 40% of your capital to invest in crypto. The remaining 60% could be invested in traditional stuff of your choice (equities, bonds, real estate). But let see in detail a simple portfolio management strategy.

Simple Portfolio Management Strategy

  1. Maintain about ten, or more, equities in the portfolio.
  2. Maintain about equal asset allocation between the ten equities.
  3. Consider the investment horizon from one to four calendar years.
  4. Be skeptical of investing in assets with less than a two and a half year history with a minimum of four and a half years.

Four simple policies listed in order of importance, and the second policy is the one that makes the money or the “engine” of the strategy. A short investment horizon is mandatory because “risk management” is an important part of financial engineerin g and given enough time, no matter how small the risk, it will bite.

At the moment there aren’t ten cryptocurrencies that satisfy my needs in terms of Gain (G) and Volatility (RMS) so I have to find a compromise, using only five crypto and, personally, i prefer to don’t maintain an equally asset allocation among all cryptos because there is a huge difference in terms of size between Bitcoin and the others. Another issue is that many altcoins have less then 2 years of history because this new sector is relatively new so it is difficult to respect rule number 4.

Another important concept is how frequent to balance the portfolio. Doing it every day is really not necessary for the casual long term investor. An interesting choice is to rebalance asset allocation if there is an asset that exceed all the others by 5-10%. Basically when one asset increased in value more than the others, money should be removed from the investment, and re-invested in all the others thus defending the gains through investment diversification.

Aggressive Portfolio

Aggressive Asset Allocation with ~40% in crypto (click to enlarge)

The suggested asset allocation is intended as very aggressive having almost 40% allocated in cryptocurrencies, I would advise not to follow this if you are over 65 or if you have a family with kids. In this case I would suggest a maximum of 10% invested in cryptocurrencies (e.g. 6% Bitcoin, 4% Ethereum or 6% Bitcoin, 2% Dash, 2% Monero).

In the case of a very conservative asset allocation, for who has a very low risk tolerance, I would not go beyond 5% allocated in cryptocurrencies.

Personally i’ve a very high aggressive asset allocation but I’ve all the time and experience to follow carefully my Portfolio and to act accordingly to new information on a daily basis.

In the future i might publish other updates about the subject with updated quantitative data on altcoins/bitcoin.

 

 

Offtopic: Quantitative Analysis of Altcoins, part II

In part I, I did a quick analysis of altcoins compared to XBT, this time i’m going to check their performance using all available data of each altcoin since inception date using daily data instead of weekly to improve the granularity of the analysis because, the finer the granularity of the analysis, the better the insights for understanding the characteristic of the asset.

ALTCOIN Gain (G) Volatility (RMS)
Ethereum      0.998               0.072
Monero      0.996               0.073
Next      0.995               0.074
Dash      0.993               0.111
Litecoin      0.991               0.115
Ethereum Classic      0.990               0.084
Stellar Lumens      0.987               0.135
Eos      0.981               0.126
Iota      0.979               0.117
Bitcoin Cash      0.977               0.161
Ripple      0.975               0.187
Zetacash      0.947               0.201
Qtum      0.912               0.265
Bitcoin Gold      0.740*               0.570*

*Note that because of the very short size of the Bitcoin Gold dataset, its Gain (G) and volatility might change a lot in the long run.

If I were forced to assemble a portfolio of altcoins, i’ll probably opt for low volatility alts, like Ethereum, Monero, Next and Ethereum Classic. Eventually I would add Dash and Litecoin because by increasing the number of assets as a result I will reduce the final volatility of the portfolio.
At the end of this post you will find what i’d actually do if asked to diversify an initial capital of bitcoins.

To give you an idea of the Gain (G), you have to power this number to the number of days interested, for example (G)^365 will give you the average value of your asset in 1 calendar year.

For Ethereum is:

0.998^365 = 0.4815

or a 52% expected decrease in value towards XBT in 365 days.

How Much to allocate individually on each altcoin?

This is a simple question with a simple answer, the formula to obtain the fraction of your capital to wage on a particular asset is:

F = 2P - 1

Where P is the Shannon Probability and F the optimal fraction of your capital to wage. The Shannon probability of a time series is the likelihood that the value of the time series will increase in the next time interval. The Shannon probability is measured using the average, avg, and root mean square (volatility), rms, of the normalized increments of the time series as i explained in previous udpates.

For Monero is:

F = 2 * 0.4953 - 1 = -0.0096 or ~1% as an optimal fraction to wage

For Ethereum is:

F = 2 * 0.5079 – 1 = 0.0158 or 1.6% as an optimal fraction of your capital

Monero has both the Persistence and Gain negative but what about Ethereum? How is it possible to have a positive persistence and negative Gain (G = 0.998)?

Well the point is that an asset’s gain in value can be negative, even though the likelihood of an up movement is greater than 50% or 0.50 (in this case 0.5079). How can the time average of something be positive, and result in negative values?

It may seem counter intuitive, but just because the average daily gain in value of an asset is positive, is not sufficient evidence that the asset’s value will increase or be a decent investment.

Do we really see asset class with these kinds of price characteristics?

The answer is that we do. During the dotcom equities bubble of the 2000, about half of the equities had these characteristics; many were to fall the hardest, too. I think the same about many altcoins/ICO, they will end badly in comparison to Bitcoin.

This is why a possible asset allocation might be to go short against Altcoins with a fraction of your Bitcoins (says 10% shorting 5 crypto); it is a strategy that might suffer some losses in the short term if you are unlucky with volatility going against you, but it will surely win in the long run.

In the upcoming PART III – We will better understand how to assemble a portfolio of cryptocurrencies starting with EURO or USD instead of Bitcoin and it’s intended for who hasn’t yet invested in any Crypto.

 

Weekly Range Update: at resistance

eng
XBTUSD Daily Chart – VWAP and dev. levels

XBT/USD weekly price range 7600$-10700$ | The 2-month VWAP is now at 6600$, the resistance zone ranges from 9600$ to 10700$ and is defined by the 3rd and 4th price deviation line.
XBTUSD begins the week at a resistance level, however this pair has proven that it is not impossible to reach the fourth positive deviation line above VWAP, it has already happened on November 8th.

The support area ranges from 6600$ to 7600$ and is defined by VWAP and the 1st deviation line.

In the event of a strong profit taking, I think it is very difficult to see a test down to the VWAP at 6600$, given the enormous strength of this market is much more likely that the support level at 7600$ will hold.

The RSI oscillator is clearly overbought with its average just above the threshold level of 70; these two conditions do not preclude a further boost of the market up to 10700$.

In the event of an unexpected catastrophic news, the support area on the weekly chart is updated to 3700-4400 USD.

ITA version here.

Weekly Range Update

XBTUSD dailychart
XBTUSD dailychart

XBT/USD weekly price range 6800$-8600$ | This week the 2-month VWAP updates to 6100$ from last week’s 4800$; new data is replacing the old ones and it may happen that you have some slight changes on the price level of the reference average.

The resistance zone ranges from 8600$ to 9800$ and is defined by the 2nd and 3rd deviation line of the 2-month VWAP.

The support area ranges from $6100 to $6800 and is defined by VWAP and an intermediate level between the VWAP and the 1st deviation line.

I think it is very difficult to see a test down to the VWAP at $6100, if there were to be some profit taking the market should not fall below $6800, considering that the RSI oscillator turned upside without testing the oversold area i still believe that this market will go over 8000$ eventually after a small correction towards our first support at 6800$.

The other template I use on Tradingview with KAMA average and deviation levels is very similar to this one; the weekly KAMA is at 5800$ not far from the 6100$ of the 2-month VWAP.
The resistance zone is 8000$-9300$, slightly lower than the one presented with this update of 8600$-9800$.
Basically we have a decent correlation between the two templates (VWAP using Sierrachart and KAMA using Tradingview. com)

In the event of an unexpected catastrophic news, the support area on the weekly chart is updated to 3200-4000 USD.

ITA Version Here.

Weekly Range Update

XBTUSD dailychart
XBTUSD dailychart

XBT/USD weekly price range is 6500$-7600$ | The resistance zone ranges from $7600 to $8700 and is defined by the two deviation lines furthest from the VWAP.

I think it’s time for a correction to the first support located at $6500, the buying area for this week is from $6500 down to $5400. I think it is very difficult to reach $5400, a minimum at $6500 is much more likely and would not compromise the possibility to see a new ATH this week.

As explained many times in the past, it is important to look at where bottoms and tops are located to understand in which direction is headed our cross XBTUSD , given the great strength of the last two weeks it would be more consistent to have a minimum at $6500 rather then $5400.

To conclude the first level to observe is $6500, the next $5400 and without unexpected negative news it’s very unlikely this week to test the VWAP at $4350.

In the event of an unexpected catastrophic news, the support area on the weekly chart is updated to 2250-2875 USD.

Since many people asked me more details about these extreme price levels, I want to spend few words on how the support area is calculated in case of a strong drop due to unexpected negative news. I use the last 52 weeks to calculate bitcoin volatility and starting from the closing price of the previous week I project two support values using 6 and 7.5 times the initial value of the calculated volatility. In the past I have explained the concept of the “six sigma”, which concerns the construction quality in industrial processes and I have applied it in this field to calculate support levels and resistance levels which are practically inviolable and which obviously only apply for the current week.
A value of six times is used, with an extra tolerance of 1.5, to arrive at a maximum deviation that uses 7.5 times the initial volatility.

ITA Version here.

Weekly Range Update

XBTUSD dailychart
XBTUSD dailychart

XBT/USD weekly price range 5350$-6600$ | The most obvious thing for this week is that the XBTUSD cross will spend most of the time in a sideway movement between 5350$ and 6000$ considering that it comes from a rise with a strength never seen before since I follow bitcoin.

The buying area is the same reported in the previous update, ranging from 4700$ to 5350$, the resistance zone from 6000$ to 6600$.

The RSI oscillator and its average are both overbought as logical after the sharp rise seen in recent days. I believe that this will be an interim week with the price remaining between 5300 and 6000 USD, so I think a strong bearish movement is unlikely to push bitcoin down to the 2 months VWAP , now at 4100$.

In the event of an unexpected catastrophic news, the support area on the weekly chart rises to 2400-3100 USD.

ITA Version here.

Weekly Range Update: Over 4300$

XBTUSD dailychart
XBTUSD dailychart

XBT/USD weekly price range at 4300$-4800$ | There is an unusual situation this week, the 2-month VWAP average is flat since the bottom of 15 September, therefore neutral trend for the short term. However, the market has surpassed the resistance value I mentioned last week, at $4300, this is a positive note.

To bring the short-term trend back to the upside we need to stay above $4300 at least for the whole week. The resistances shown in the graph range from 4800 to 5250 dollars.

In the previous update I had suggested to my readers a short term long operation from about 3600$, who followed this “trading idea” will surely have had a decent profit, I invite you all to keep this operation open as long as the XBTUSD cross will remain above $4300, below this level I suggest to close the position.

The RSI, as I said last week, has already given a sign of purchase that is now confirmed by its average which is on the rise, however we have not yet entered the overbought area leaving margin for a possible rise up to $4800.

In the event of an unexpected catastrophic news, the support area on the weekly chart rises to 2100-2600 USD.

ITA version here.

Weekly Range Update

bitstampUSD 1 Day #1 2017-09-18 09_48_01.095
XBTUSD Daily Chart – VWAP Levels

XBT/USD weekly price range at 3650$-4300$ | As I wrote on twitter the market found support within the support area of my previous update that had a lower limit of $2800. I would like to point out that I will not increase my long-term position opened between 2014 and 2015, but I will tell you when there will be a buying opportunity.

Today’s reaction is positive and I believe that in 1-2 days the ALMA moving average will turn upwards together with the average of the RSI oscillator.

The RSI has already given a purchase signal, but it is better to confirm it when its average slope will also turn positive.
When these conditions are met we will have a buying opportunity.

In the event of a catastrophic news, the support area on the weekly chart remains unchanged at 2000-2500 US Dollars.

ITA version here.

Short Tem Update: KAMA Levels

KAMA Levels
KAMA Levels

XBT/USD weekly price range at 4000$-4950$ | The price range for this week is not very different from last week, we have seen until now a weak September with the price drop from the all time high of 5000$ and despite several negative news the XBTUSD has remained above 4000 dollars.
As you can see in the graph the support area using my KAMA indicator ranges from $3600 to $4000, the resistance zone from $4950 to $5350.
If the 4000$ support will work, then an upward cycle with a minimum target of 4950$ could start, otherwise the 2-month VWAP around 3400$ is an important support.
I think it’s unlikely to see bitcoin under the vwap at 2 months for this and also next week, otherwise it would mean that on the weekly chart a medium-long term correction has started; however it’s still early to say and let see if XBTUSD can stay above $4000 this week.

In case of a unexpected catastrophic news, the support area on the weekly chart is 2000-2500 USD

ITA Version here