Crypto Report + PMP*
by Dr. Chris Kacher
*PMP at end of piece
Too High To Buy?
A member asked if bitcoin or ethereum are too extended to take a position here. Jesse Livermore used to say the big money is made by the sitting on the right names, not the trading. And the cryptospace charts are still clean enough to capitalize on this. William O’Neil agreed with this therefore used a 10-week moving average with stocks as his primary buying and selling guide. Such a long time horizon insured he would stay in for the big gains. That said, today's stock market is vastly different from the 1980s and 1990s, thus shorter time horizons on a risk/reward basis make more sense. But in the cryptomarkets, longer time horizons make sense.
That said, one must know their risk tolerance levels. With crypto, one may choose to buy a small starter position then pyramid higher in measured amounts. Bitcoin and many other cryptocurrencies have a tendency to enjoy uptrends that last a number of months or longer, though volatility is much greater when compared to even high octane stocks, so one must understand what risks they are willing to take, then position size accordingly.
I always use charts such as the one below that have logarithmic scaling since the best cryptocurrencies tend to rise by orders of magnitude. Thus on a chart, what looks like minor pullback are typically -33% or greater. But this illustrates how riding the longer term trend can be immensely profitable. The chart below shows nearly 9 years of bitcoin price history.
As for the concern about holding through massive corrections well beyond -50% to -75%, my metrics taken as a whole have correctly called major tops and bottoms in bitcoin since 2011. This is why I went to 100% cash on January 30, 2018. Various metrics had shown in December that bitcoin was at its upper limits, but its chart pattern was the final judge.
Bitcoin started to head lower after it topped on December 17, 2017, but ethereum continued to move to new highs. More importantly, all of the cryptocurrencies I was holding at the time were only one or two days off their all-time highs on January 30, or 6 weeks after bitcoin topped such as WTC (Waltonchain) and NEO (Neo) as shown below.
This illustrates how top performing cryptos will often keep moving higher despite bitcoin having topped a couple weeks prior. This was also true back in Nov/Dec 2013 which was the top of the prior bitcoin bubble.
My metrics notwithstanding, the bitcoin chart pattern carried the greatest weight in terms of guiding my decision to sell all my cryptos. As shown below, bitcoin prior to January 30, 2018 had attempted feeble, low volume rallies after looking as if it had topped, thus its initial drop which undercut these attempts was an obvious sell.
Since other cryptocurrencies highly correlate with the price of bitcoin, with the best ones well outpacing bitcoin sometimes by orders of magnitude, I take a quantamental approach to finding such outperforming cryptocurrencies. I use fundamentals and technicals to first see where bitcoin is at in terms of its price progress. Is it in a major bull or bear market? This helps me determine my overall exposure to the cryptospace. I then screen for crypto companies with top line fundamentals using charts to time my entries and exits. I then sometimes sit for months or longer especially with cryptos bought some years ago while the bitcoin bull market progresses. During bear markets, if I invest in cryptos at all, my holding times are typically on the order of weeks or less.
That said, many in the cryptospace prefer quick swing or day trades for quick profits. The typical holding period is a few days or less. Many day traders look to game the system for profit as discussed in this article here. Thus there are many more minefields short term traders must expect to encounter while those who hold longer term are largely immune to short term manipulations.