TechDev Newsletter - Full Issue #1
Welcome to the first full issue of the TechDev Newsletter.
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Bitcoin Top Gauge
We'll begin with the introduction of the Bitcoin Top Gauge, which is exclusive to this newsletter. This gauge reading will be updated 2 times a week in newsletter issues.
It is one I have developed personally by combining 3 different price-action-based indicators which have each on their own called the Bitcoin cycle top in every cycle to date (2011, 2013, 2017) with reasonable accuracy.
While each indicator is effective on its own, I believe their combination offers an even more accurate look at our proximity to the Bitcoin cycle top.
By combining readings from all 3 indicators, and comparing it to a combination of their critical levels, I've derived a single number which has fallen within historically reliable ranges at cycle lows, mid-cycle lows (more on this in next section), and tops. We'll refer to this as the Bitcoin Top Gauge.
The Top Gauge ranges between 20 and 100, where 20 represents proximity to the cycle low and 100 represents proximity to the cycle top. The reading should be taken as a guideline. It is not expected to reach its max level exactly at the Bitcoin cycle top and may even overshoot.
Let's quickly backtest:
At the 2013 low, Top Gauge read 20.
At the 2017 low, Top Gauge read 27.
At the 2021 low, Top Gauge read 23.
At the 2013 mid-cycle low, Top Gauge read 38.
At the 2017 mid-cycle low, Top Gauge read 53.
At the 2021 mid-cycle low, Top Gauge read 31.
At the 2011 top, Top Gauge read 101.
At the 2013 top, Top Gauge read 100.
At the 2017 top, Top Gauge read 100.
It is advisable to consider ranges on this gauge, rather than exact numbers. For our purposes, we'll consider:
Cycle Low Near = 20-29
Cycle Top Near = 95-100
Anything over 95, and it's time to closely track lower time frame indicator levels and price action to more precisely identify the top.
Today's Top Gauge reading is 66.
The Top Gauge is based on the following price-action indicators on a 2-week timeframe:
Relative Strength Index (RSI)
Relative Volatility Index (RVI)
Stochastic RSI
Here is a chart showing all 3 indicators along with the full history of the Bitcoin 2-week price chart:
In future issues, we'll discuss these indicators in more detail, but let's leave the introduction to the Top Gauge here for now.
Future issues will also involve a discussion of on-chain indicators such as RHODL Ratio and MVRV Score, as it is important to consider both on-chain and price action indicators together. Especially those which have a solid track record calling Bitcoin tops.
Macro Bitcoin Chart
While our top indicators are the guiding light, I find it powerful to combine them with historical macro Bitcoin price action. They offer sanity checks of one another. If our indicators suggest a top as price nears historically expected top levels, we'll have added confidence in the call.
Perhaps the most elegant and simplistic view of Bitcoin's macro price action landmarks comes from considering a pair a logarithmic Fibonnacci extensions (log fibs for short) over each Bitcoin cycle.
These extensions are taken from previous cycle high to current cycle low, and are calculated on a log scale (rather than linear, as is more common).
Given Bitcoin's logarithmic growth trajectory since it began trading over 10 years ago, it makes sense that we would find consistent cycle behavior around key log fib levels (as opposed to linear ones).
There have been two "full" Bitcoin cycles to date:
Cycle 2 (which topped at the very end of November 2013)
Cycle 3 (which topped mid-December 2017)
They are the only two (other than our current cycle) to contain Bitcoin halving events. We'll refer to these as 2013 and 2017 going forward.
Cycle 1 (which topped in 2011), did not have a cycle before it (nor did it contain a halving), and thus cycle fib extensions cannot be drawn.
In each of the full cycles, remarkable consistency can be seen in two key log fib extensions.
First, in both 2013 and 2017, after a significant correction, Bitcoin put in a local low around the 1.272 log fib extension in July. Our current cycle has followed suit, and once again put in this low around the 1.272 in July. We refer to these local bottoms as the "mid-cycle low" (credit to @jclcapital and his group CTM who were among the first to use the term).
Second, both 2013 and 2017 saw their cycle tops just above the 2.272 log fib extension, at the very end of November and mid-December, respectively. Effectively the same timeframe − separated by roughly 2 weeks over a 4-year span.
Since 2021 followed 2013 and 2017 with a mid-cycle low around the 1.272 in July, might we see it follow again with a top just above the 2.272 in December?
If so, that puts a 2021 top in the 200K-250K range, so let's keep an eye on our indicators if we are fortunate to approach it.
Alt Top Targets
Anyone can come up with the most optimistic targets, but if they are not backed by any historically-supported technical analysis, it will be quite difficult to hold until they are reached.
Developing technically-based top targets for your altcoins is critical to a sound and risk-managed exit strategy.
This is not easy. There are literally thousands of altcoins, each with different accumulation structures, at different maturities, and at different market caps. Each of these factors (and more) will play a role in where they top.
There is no perfect. The best we can do is use history to estimate where a coin's macro chart is likely headed, based on where it's been.
What I have noticed is that last cycle, many alts seemed to top near their 4.236, 6.846, or 11.1 fib extensions when taken from their mid-cycle high to mid-cycle low.
Here are three examples:
In the first case, the lowest market cap of the three, price peaked above the 11.1 fib extension.
In the second, at 4x the market cap, price topped right at the 11.1.
In the third, with market cap 8x higher than the first, we reached the 4.236.
It gets more complicated if one dives deeper into particular structures, Elliot Wave counts, and trend-based fib extensions.
For now, my simplest approach to estimating alt top targets is to pull the 4.236, 6.846, and 11.1 extensions and treat them as "conservative, realistic, possible" targets, respectively.
Future issues will discuss how to estimate the more likely fib target for a specific alt, given its structure and market cap.
General Alt Exit Strategy
Setting targets, with a well-planned exit strategy, is a sound approach.
You may choose to set limit sell orders at each target to so-called "ladder-out", or you may choose to bet on one target in particular and set your limit sell there. Your plan should incorporate your risk tolerance and align with your financial goals for this cycle.
An alternative, or backup plan to exiting each alt at specific targets, is to look for the top of the altcoin market as a whole, and exit everything there.
Fortunately, the Bitcoin/crypto market cycle offers some unique clues when that is about to occur. Clues that can be used to your advantage if you know where to look.
Let's examine the correlation between total altcoin market cap and Bitcoin price in 2017. We see that typically, when Bitcoin dips and rises, alt cap dips and rises proportionally.
However, there were two points in 2017 when this proportionality broke significantly: the mid-cycle and cycle peaks.
Here we see that after Bitcoin peaked, it and alt cap fell together. Then; however, Bitcoin made a lower high, while alt cap made a higher high.
Taking it a step further, we see in both cases that Bitcoin's 0.702 fib retracement predicted its lower high and thus, the local alt cap peak.
Fundamentally, what this reveals is the net flow of capital from Bitcoin to altcoins. At the top of major Bitcoin impulsive waves (the mid-cycle and cycle peak), investors tend to move Bitcoin profits into altcoins to compound their gains.
So, while there is enough temporary buy pressure to send Bitcoin up to its 0.702 retrace, the rotation from Bitcoin to alts, combined with their rise in USD value from Bitcoin's retrace, causes alt cap to temporarily outperform Bitcoin, and leads to this price divergence.
We saw this exact same phenomenon during 2021's mid-cycle peak, and I expect we'll see it again at the cycle peak.
So, how can we use this to our advantage?
Three primary ways:
Use it as confirmation that Bitcoin has indeed topped. If you didn't exit Bitcoin at the peak, do so at the 0.702 retrace.
As soon as Bitcoin bounces, and you identify alt cap is outperforming, rotate Bitcoin positions into alts, as smart money is doing.
Perhaps most importantly, use Bitcoin's arrival at the 0.702 to time the general alt market top, and exit alt positions there.
Future issues will continue to explore this price divergence phenomenon, and the specific ways in which it can be used to our advantage.
Awesome Indicator, Bitcoin Top Gauge !
Thanks !