August 21, 2021 (First Published), August 5, 2024 (Modified)
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Table Of Contents:
They say, past performance is not indicative of future results. This may be true in general cases where results are purely random. However, if we can analyze the past performance and establish a particular pattern or path, then indeed we can use the known to determine the unknown..
We will use Fibonacci series to analyze how Bitcoin’s price will trend. Just to point out, this is a very good indicator when you want to know the levels where price will form the next highs and lows, in a growth-based market. This is important, especially in a scenario where you do not have past performance which you can use as a basis to project future prices. In essence, the price tends to be self-supporting as we shall see. In addition, markets are driven through supply and demand, which when drafted in a graph forms cycles with tops and bottoms which tend to be in sync with Fibonacci ratios.
Let me illustrate in simplicity what we mean by Fibonacci ratios. It states that when you add a number with the number preceding it, in this case as an example 1 + 1 +2 + 3 + 5 + 8 + 13 + 21 + 34 …. and so on, you will arrive at a point where a number divided by its preceding number forms a golden ratio of 1.618 e.g. 34/21 = 1.619. In addition, when the number is divided by the succeeding number it forms a ratio of 0.618 e.g. 13/21 = 0.619. This is also a naturally occurring phenomenon in nature. Now taking that into note, let’s take into consideration the ratios we use for trading. We have …..
0.618 + 1 + 1.618 + 2.618 + 4.236 + 6.854 + 11.09 + 17.944 + 29.034 + 46.978 + 76.012 + 122.99 + ……
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Now, an insight. In trading they say a previous resistance becomes a support. Interesting, right. Let’s see in Fib ratio, to form the next number a number must be added to it’s previous i.e. for a high to form a new high, the previous low must be taken into consideration. For example, to form 1.618, the previous high of 1 must include/added to a low of 0.618 to form 1.618, a new high. According to Elliot wave analysis, this becomes a series of impulse and correction.
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Have you noted, in trading and investment cycles people like talking about, “Buy low, sell high” or “Buy dips”, what they actually mean, is by buying the higher lows and selling at higher highs we gain a considerable profitable margin than can be compounded by buying at the next higher low. That’s how you grow your networth.
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So what are halvings? in simple language, it is the inbuilt characteristic of Bitcoin that after each 210,000 block, the quantity of Bitcoin mined and the price reward for mining Bitcoin reduces by half. This is achieved through increased difficulty in mining, which results in a diminishing supply of bitcoin. The reward is in BTC and is priced per block.
When supply reduces while demand increases, this results in a significant price increase. As we said, these prices have a series of major high and major low during a halving, which is approximately 4 years. During the bull and bear trend there are also mini-trends that form highs and lows all in line with Fibonacci series. I hope you’re connecting up to this point.
Between 2009 when Bitcoin was launched to 2012, also known as the first or genesis halving, the block reward was at 50 BTC per block and the amount of Bitcoin mined per day was 7,200. So this then are the series of BTC per Block reward for the subsequent years, i.e. 25 BTC between 2012 to 2016, 12.5 BTC between 2016 to 2020 and 6.25BTC as of 2020. The Bitcoin mined-per-day series is as follows: 3600 BTC from 2012, 1800 from 2016, 900 from 2020. The last Bitcoin mined is estimated to be in 2140.
Due to the distinguished characteristic of supply and reward for each halving it is of vital importance thus to use halving's, i.e. the 4 year periods, to analyze Bitcoin’s price. Our timeframe of preference will be the weekly timeframe.
We now have two knowns by which we can do our analysis, we know that supply is diminishing based on the halving's and price is increasing due to increased demand and diminishing supply. The other unknown which is demand follows Metcalfe’s law, network effects and platform concepts. In this case, whereas supply can be tracked through the miner’s hash rate, demand can be tracked through wallets that hold bitcoin and the number of active nodes, because this denotes the ability to utilize.
Now considering the Genesis halving of 2009 that had an approximately All-Time-High of 29, this forms a basis of a known All-Time-High that we can compare with the next All-Time-High as per the Fibonacci series and establish a pattern.
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NB: All-Time Highs are a range rather than a specific price level. For example, this could be between 800 to 1200 rather than 1177. So it’s an estimate and subjective rather than objective and exact. This should be noted, as due to price volatility in lower timeframes. So have a good margin of error to accommodate for volatility along with this levels of interest.
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To establish some objectivity, we will consider the following:
Review:
- Genesis Halving All-Time-High (ATH) week — 6th June 2011, low was @ 10.32$ & high was @ 31.9$ . Our preferred price is 29$, 90% of ATH
- 1st Halving ATH week — 25th Nov 2013, low was @ 772.05$ & high was @ 1,177.19$. Preferred price is 1079$
- 2nd Halving ATH week— 11th Dec 2017, low @ 15,080.77$ & high @ 19,764.51$. Preferred price is 19,325$
The ratios are as follows:
1,079$ / 29$ = 37.2
19,325$ / 1,079$ = 17.9
Remember our Fibonacci Trading series: 0.618 + 1 + 1.618 + 2.618 + 4.236 + 6.854 + 11.09 + 17.944 + 29.034 + 46.978 + 76.012 + 122.99
On this note, 37.2 is closer to 29.03 i.e. -8.17 than it is to 46.978 i.e. +9.778.
Let’s go back a bit and note the ratios it started with: 29$ / 46.978 = 0.6173$. 0.6173$ / 76.012 = 0.008121$. Apparently 0.008$ is a historically recorded price for Bitcoin as an All-Time-High on July 12th 2021 as per this article.
<aside> <img src="/icons/brightness-high_lightgray.svg" alt="/icons/brightness-high_lightgray.svg" width="40px" /> Insight on Fibonacci and growth: As Bitcoin unravels or disentangles itself, The multiple factors in the Fibonacci series continue to reduce. Thus we can say that Bitcoin has diminishing returns as the years will progress and as it even forms higher prices but a lower multiplicity factor. This method can be used to identify the price-discovery structure of new innovations like crypto (altcoins).
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Point in case it had a shorter time cycle to go to the Fibonacci multiple of 76.012, then recorded a multiple 46.978 in 2011, thereafter in 2013 it did a multiple of 29.034 closely followed by multiple of 17.944 in 2017. This leads us to project a multiple of 11.09 in 2021 with a margin of error of +10%.
Let’s analyze the patterns of previous lows and understand. One halving after the other. So we picked our preferred prices as follows and let’s multiply with 0.318 as the retracement level:
As it can be seen, the Bitcoin Price correction was way below the target of 0.318 in 2017, the price going below 343.12$ thus making that a good take profit level for sell trades. As we said, these are price ranges and not exact or absolutes and as long as the price crosses our target level, we are good to go. So a correction to 70,450$ and below to some +10% coming from ATH is an estimate.
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Alright, now you know how higher highs are formed and how higher lows are formed. So next question is how do we benefit from this profitable price adjustments?
Now I am quite sure, you have heard about how risky it is to trade in bitcoin. The frequent price fluctuations, the high volatility and many other stories. ‘So is it true or not true?’, you might be asking and if true ‘how do you still profit without necessary exposing yourself to significant risk?’
To answer, the price fluctuations that create the volatility are normal. However, if you zoom out, what looked like a significant mountain looks like an anthill from a higher timeframe. Check this out:
Bitcoin Price Fluctuation — 2013 Bull Run
Bitcoin Price Fluctuation — 2017 Bull run vs 2013 Bull run
When we model and compare, the 2013 bull run with the 2017 bull run within the weekly timeframe, we note the following: whereas there was a 1,500% price increase from a low of 70’s to high of 1100’s it looks significantly small when compared with the 2017 bull run. It can be compared, with flying on a plane where what looked like mountains when you were on the ground, are now reduced to anthill size when you are up in the air. So price fluctuations and volatility are normal but have significant less impact from a longer term view but let’s see why.