When you read an article about the price of Bitcoin or see a news reporter talk about it on TV, they typically show a chart for the price of Bitcoin on a standard scale. It looks something like this:
Only looking at Bitcoin's price in this way is problematic. It shows two huge spikes in the past 18 months and not much else, leading many to jump to the conclusion that Bitcoin is just a bubble.
Bitcoin is a technology that is being adopted very quickly over time. Like anything that is growing so fast, we preferably want to view it on a logarithmic scale. This means that the price scale (y-axis) increases by powers of 10. Viewing it this way evens out the more recent volatility and allows us to see trends in the data over time that were not visible on a standard scale:
Using the log scale, we can now see the broad arc shape of Bitcoin's price curve rise over time as more people buy Bitcoin forcing its price to increase. This is the adoption curve of Bitcoin.
On top of that adoption curve we can see the market cycles that Bitcoin moves through. These are stages where the market becomes over optimistic (price peaks) and over pessimistic (price bottoms).
You can now use the charts on this site because you know:
1. Viewing Bitcoin's price chart on a log scale allows us to see trends over time.
2. Bitcoin's price is behaving like the adoption curve of a technology being adopted very quickly.
3. On top of that adoption curve, Bitcoin's price goes through market cycles.
However, new investors may choose to start with more straightforward charts before moving on to the other charts on the site. The more straightforward charts are:
- Bitcoin Investor Tool
- 200W Moving Average Heatmap
- The Puell Multiple
- Pi Cycle Top Indicator
- Bitcoin Profitable Days
- Bitcoin Network Momentum
There are no recommendations given on which charts should be used over others. This site does not give financial advice and should investors wish to use the charts, they can decide which combinations of charts they find most useful.
Bitcoin goes through market cycles. Each cycle has a period where the price peaks as people become overexcited about Bitcoin, and a period where price bottoms out as people become overly pessimistic about its future.
Market cycles are not unique to Bitcoin, we see them in many other markets. For example, real estate has these cycles also, but on longer time frames. Market cycles are simply the result of market participants psychology affecting the price of the product over time.
Understanding that Bitcoin is cyclical is very important for a Bitcoin investor. Prices surging and then falling back are in the grand scheme of things nothing to be overly concerned about. We also see that with each cycle, the price of Bitcoin falls back to a higher base than the base of the previous cycle i.e. price is increasing over time with each cycle as Bitcoin continues to be adopted.
We use market cycles as part of our analysis because if we know Bitcoin goes through these cycles then we broadly know where it is likely to go next. For example, you’re less likely to keep buying at the top of a market cycle if you know that at some point the price will need to pull back.
The inevitable truth about market cycles is that most people buy towards the top, paying a high price, and sell low towards the bottom, receiving a low price. By understanding market cycles, it is possible to personally avoid this situation.
Two of the most commonly discussed approaches within the Bitcoin space are HODL'ing and trading using leverage.
HODL: a person continues to hold on to their bitcoin no matter what happens to the price, in the belief that the value will rise over time.
Trading: a person places trades on whether the price will go up or down using leverage (margin) to magnify potential gains.
Both have their merits but also have issues.
A person who HODL’s has to experience the extreme volatility of Bitcoin's market cycles. The most recent down market for Bitcoin resulted in an 84% drop in the value of a HODL'ers Bitcoin holdings. This level of downward price movement can be too much for people to take and some can end up selling on the way down to 'cash out'.
The reality on the opposite end of the spectrum with margin trading is that the majority lose money. Over 90% of Bitcoin traders lose money over time. The reasons for this are explained elsewhere and are worth looking up if you are considering margin trading. In summary, it comes down to the risk you expose your funds to by using leverage. That risk is then magnified in the highly volatile crypto markets.
Strategic investing can act as a very useful mid-point between these two extremes. It doesn’t use the risk of margin trading but is more adaptable than simply HODL’ing. The idea being that an investor can apply an understanding of market cycles and blockchain analysis to determine when may be better times to buy or sell on a long (multi-year) time frame.
Nearly all of the charts on this site highlight conditions where, historically, outsized returns were achieved by buying or selling during certain times. Thereby allowing an individual to adopt a strategic investing approach should they wish.
On-chain analysis goes by several names. It is sometimes called blockchain analysis, on-chain analytics, blockchain economics, or network forensics. Whichever name is used, a similar analysis is taking place.
Data created by transactions that take place on a blockchain is used to understand the behaviour or motivations of the participants of that blockchain.
Let's look at an example. When Bob sends Alice one bitcoin, that transaction is recorded on the Bitcoin blockchain. We are able to look at that transaction data to see from which wallets the bitcoin was sent from and to, the amount of bitcoin that was sent, and the time it was sent. Because all transactions are recorded on the blockchain and cannot be changed, we also know all the historical transactions of that one bitcoin since it was mined (created). So, not only can we see the data from the recent transaction of Bob sending the bitcoin to Alice, but we can also see data for all the previous transactions of that bitcoin before it came into Bob's possession.
By grouping and analysing this publicly available blockchain data it is possible to learn about the actions and motivations of market participants over time. Price data can then be overlaid on top of this blockchain data to provide useful forecasting tools such as the ones found on this site.
This is a very topline explanation of what blockchain analysis is. There are free resources available online if you would like to learn more. I would also recommend reading the articles hyperlinked underneath the relevant charts on this site.
UTXO's stand for Unspent Transaction Output. They are an important accounting method on the Bitcoin blockchain.
UTXO is essentially referring to the balance of coins held by a specific address. That is because it represents the output of a transaction received by a wallet which can be spent in the future - as it is unspent.
When building on-chain indicators, UTXO's are often used as the data sources for a lot of the data. By looking at the ages, sizes, and amounts of UTXO's on the Bitcoin blockchain we can compile the data to create indicators, as that aggregated data tells us about the behaviours of participants on the blockchain.
A moving average is a commonly used indicator for identifying an asset's general direction, up or down. It gives an indication of trend direction because it smooths out short term volatile price movements.
It does this by taking the average price of the asset (Bitcoin in this case) over a number of days.
For example, Bitcoin's 50 day moving average is the average price of Bitcoin over the past 50 days. It's 200 day moving average is the average price over the past 200 days. The longer the moving average period, the more it lags behind the live price, because it contains prices for a longer time period.
The result is a smooth trend line over time compared to the actual live price line which is more erratic.
Because the price of Bitcoin goes through market cycles, certain moving averages are very useful to confirm broad trend directions or reversals. They can help us forecast scenarios based on what has happened to price previously when it interacts with those moving averages.
History doesn't repeat itself, but it does influence the future. Particularly when dealing with assets such as Bitcoin that experience market cycles. Moving averages can act as a useful forecasting tool within that context.
You may notice some of the chart indicators behave erratically pre 2012.
During this time Bitcoin was in its early price discovery stage. There were a relatively small number of people trading it, trying to ascertain a 'fair' price, which resulted in huge price swings. As a result of this, certain chart indicators move erratically during this period before settling down into consistent patterns as Bitcoin matured post 2012.
Price and market cap data is pulled from the top five trading exchanges by volume.
Blockchain data is pulled from https://coinmetrics.io/ or https://www.blockchain.com/explorer
HODL wave data is sourced from https://www.unchained-capital.com/
This is a relatively new field of research and it is evolving rapidly. If you would like to learn more but are not sure where to start, I would recommend reading the articles hyperlinked in the descriptors underneath each of the charts on this site.
You can then follow the authors on Twitter to learn more.
I would also highly recommend visiting woobull.com where there are a number of charts that really push the boundaries in terms of pioneering data analytics and blockchain exploration.
Any information on this site is not to be considered as financial advice. Please review the Disclaimer section for more information.