Bitcoin: 'Extreme is Normal'

Photo by Road Trip with Raj on Unsplash.

Bitcoin’s price dropped 24% in the past two weeks, including 19% in one day.

It dropped 50% over the course of one week in May. It’s in the middle of a drop right now, as I write this article.

Crashes are nothing new, nothing special, just bitcoin being bitcoin, but so many people still call for a bear market and sub-$20,000 prices whenever they happen.

Those predictions are realistic. There’s no reason we can’t see this market collapse.

A bear market or a drop below $20,000 fits within price patterns we’ve seen over bitcoin’s history, especially after golden crosses such as the one we just saw. Bitcoin's Golden Cross is coming and you shouldn't care.

At the same time, the market’s on-chain data and long-term trading signals show remarkable underlying strength, far more than we saw at the beginning of 2021.

Perhaps that’s why so many people think this most recent crash, and the one in May, will lead to a supercycle, supernova, parabolic, rocket ship, “face-melting” boom.

Anatomy of a Bubble Says . . .

Both sides of the argument can each cite the Anatomy of a Bubble Chart, a near-perfect analogy for the movements of bitcoin’s price within each market cycle.

Look at this model:

1. First, smart money accumulates. Then, institutional investors (and whales) drive the prices up.

2. After that, the general public enters. The market goes parabolic before a crash and capitulation into despair.

3. Finally, once that process ends, the price goes back to normal.

Seems pretty clear, right?

Obviously, we had a bear trap this summer and we’re about to move into mania.

Or maybe not. Maybe the mania came at the beginning of the year, and now we’re all in denial before fear, capitulation, and a “return to normal” at much lower prices.

So are we here?

Or here?

Both seem reasonable.

At any given time, you can’t tell whether bitcoin’s in a “bear trap” that will lead to the next leg up or a “bull trap” that will send prices through the floor.

Maybe this chart does a better job:

In other words, one bubble cycle after another for years. At any time, it’s impossible to tell if you’re in a bear trap or capitulation, mania or a return to the mean.

Extreme is Normal

As a result, extreme moves should not phase you. Bitcoin’s price can drop 30% this month and still not break the upward trajectory it started in March 2020.

Some predict it will do just that. A-B-C correction, death spiral, dead cat bounce, bear market, etc.

After all, the market has to revert to the mean at some point, right? We started the year with a parabolic move. Should the model hold true, we should go back to where we started.

The problem is, when you look at the whole of history, the “mean” is probably higher, not lower than today’s price.

What do you mean by “mean?”

For reference, this black line is the mean of the logarithmic growth curve for bitcoin’s price since its inception:

In this chart, the black line is the arithmetic mean, with a linear price chart:

Both black lines are above today’s price. Do you know what that means?

If bitcoin reverts to the mean, its price will go UP not down.

So . . . does that 'mean,' mean anything?

No, it’s just an average of prices from a certain point in time using a certain mathematical formula. Change the timeframe and formula, you’ll get a different result.

My point:

Every upswing looks like mania. At any moment, you can’t know where you are in the market cycle.

That little drop on the right of the chart, that move we’re in right now? Is that the end of the “return to normal” or one last dip before take off? Or maybe nothing—normal volatility that will resolve in a few days?

What you see depends on what you think.

Crazy for Other Markets, Trivial for Crypto

Some will take a big upswing or downswing as confirmation of a trend or shift in trend.

Perhaps in normal markets, you could make that conclusion. Crypto is not a normal market. Its “normal” movements seem outrageous.

In the stock market, a 5% swing forces Aunt Sally and Uncle Morton to swap their Apple stock for 5-yr T-bills “before the market collapses.”

In the bond market, a 5% swing could spell catastrophe for the world’s debt markets. Fortunes gained or lost, pensions made insolvent, countries on the verge of collapse, and financial pandemonium.

In crypto, a 5% swing can happen between the time you go into the bathroom and when you come out of it.

We know based on history, the range of expectations is massive. According to data models, bitcoin’s price can go as low as $9,600 or as high as $288,000 immediately. Quite a lot of ground to cover.

You don’t have to pin your hopes on a supercycle or stress about a bear market. You don’t need to think about cycles or charts. Accept that this is a violent, speculative market.

Trends take months to play out and even the strongest trading signals have less than 70% accuracy.

You can’t make any conclusions about the trajectory of the market from its movements over a certain day or week.

Embrace uncertainty. It’s the only reason we have this amazing investment opportunity.

Mark Helfman publishes the Crypto is Easy newsletter. He is also the author of three books and a top bitcoin writer on Medium and Hacker Noon. Learn more about him in his bio.

Originally published in Cryptowriter.

Disclaimer: The opinions in this article belong to the author alone and should not be considered investment advice.