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📖 Breaking Down Bitcoin’s Price Trends with The Dow Theory 📖

by Mohit SoroutDecember 11th, 2018

Too Long; Didn't Read

<span>If</span> you hear somebody talk about bitcoin, I am fairly certain that volatility is the first thing that comes to your mind. After all it is an asset that has a history of rallying by 585x i.e. 58400% in a span of just 2 years, and then retracing by 86% within 14 months — well, that’s what happens when monetisation of a new asset class takes place. I’ll leave this topic for another write-up.

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featured image - 📖 Breaking Down Bitcoin’s Price Trends with The Dow Theory 📖

Charles Dow was the first to express trends of market cycles and his theory has applied to various financial assets of different markets for more than a century, including the globally traded Bitcoin.

If you hear somebody talk about bitcoin, I am fairly certain that volatility is the first thing that comes to your mind. After all it is an asset that has a history of rallying by 585x i.e. 58400% in a span of just 2 years, and then retracing by 86% within 14 months — well, that’s what happens when monetisation of a new asset class takes place. I’ll leave this topic for another write-up.

While I sit calmly on my laptop with a cup of coffee and write this piece, there are millions who are fretting over the price of bitcoin, and rightly so. As of writing, Bitcoin is trading at $3,410. It has declined in value against the US dollar by ~83% since its December 2017 high of $20,052. Rallies and declines of this scale are new to everyone and therefore a bit difficult to comprehend.

I am presenting to you a thorough analysis of Bitcoin’s historical price action and what the future holds by applying one of the most holistic market cycle theories in existence i.e. The Dow Theory. Market trends and cycles are a direct function of human psychology and the varied emotions during each phase. After reading this brief analysis of bitcoin’s current market cycle, you will have a fairly clear understanding of what makes up a complete market cycle , the typical phases a cycle comprises of and symptoms of each phase.

A complete market cycle is made up of two primary trends:

📈 The Up Trend (aka The Bull Market 🐂) — the price consistently makes higher highs AND higher lows

Primary Uptrend confirmation

The Bull Market goes through three phases (described in the image below)—

Three typical phases of a Bull market

2. 📉 The Down Trend (aka The Bear Market 🐻) — the price consistently makes lower highs AND lower lows

Primary Downtrend confirmation

The Bear Market also has three phases (described in the image below)—

Three typical phases of a Bear market

🔍 Be warned that no two bull or bear markets are alike. They may lack one or the other of the three typical phases or may spend a lot of time in a phase that generally lasts for a short duration, like the panic phase. For instance, the panic phase of the great depression lasted 10 years wherein the years 1929 through 1932 witnessed at least 5 panic waves of major proportions. Eventually, it ended in 1939 without going through Phase III of the Bear Market. The key takeaway is to identify which phases a bull and bear market typically go through and which phase the market is in right now. If you can achieve this, your emotions are unlikely to cloud your investing judgments. For instance, if you know the symptoms which normally accompany the last phase of a bull market, you are less likely to be deluded by its exciting atmosphere. Same logic applies to different phases of the bear market as well.

Bringing everything together, I leave you with the complete cycle and a final thought:

💭 I’m leaning towards possibility #1 that bypasses phase III of The Bear Market. This is because of mid-term fundamental catalysts surrounding Bitcoin/USD market. However, I’m prepared for possibility #2, should it happen.