Updated: Dec 11, 2021
This article is yet another one, and I think I will still continue to write more on Bitcoin as this space continues to evolve over time. If you have been following my blog, you probably have noticed that I always advocate holding a very small portion of Bitcoin in your portfolio as a means to diversify your investments and potentially capture the exponential growth of this asset class in the near future.
With Bitcoin prices dipping more than 20% recently, this asset class caught my attention again and I begin to wonder if there's any brief representation of how a typical Bitcoin cycle looks like, coupled with any technical indicators to look out for when monitoring the price of Bitcoin. If you have the same questions, this article will probably help you out a bit.
I came across this article on hackernoon which explains how the year to year looks like in a typical 4 year cycle for Bitcoin. If you are wondering why is it a 4 year cycle and not a 2 or 3 year cycle, it's because this duration usually coincides with the halving of bitcoin. The halving of bitcoin usually happens every 4 year and that has a big impact on the pricing of Bitcoin.
If you were to divide this 4 year cycle into 4 individual candles for each of the years (refer to the above article for infographics), you will see that the last candle is usually when the halving takes price. Following which, a new Year 1 candle of the next 4 year cycle will take place. This Year 1 candle is where exponential price growth will happen. Year 2 candle is where you will usually see some substantial dip, and Year 3 candle is where some price recovery will happen. And then it's back to the Year 4 candle again when halving happens. A new price support will usually happen here, propelling the bitcoin prices to new heights. This has already happened for the past 2 cycles. If history is to repeat itself, 2021 should be the year where Bitcoin can reach even new higher heights as this year is the Year 1 candle.
Like stock prices where we rely on technical indicators such as SMA 50, SMA 100 etc, there are also some interesting technical indicators that are used to attempt to understand if Bitcoin prices are currently overvalued or undervalued. I probably share two really interesting one in this article.
The first one is called Bitcoin Mayer Multiple. It is a relatively straightforward one as it simply compared the current price of Bitcoin against its 200-day moving average value. Using historical information, a value above 2.4 signifies overvalued territory while a value below 1 signifies significant unvalued territory. The current value which we are at is around 1.4 which is still considered a rather healthy value. You can find out more about this technical indicator here.
The second one is called MVRV-Z score. This indicator is much more complicated than the earlier one. It's derived by taking the difference of the market capitalisation value of Bitcoin and realised capitalisation value of Bitcoin, and dividing it with the standard deviation value. The market capitalisation value of Bitcoin is obtained by taking the current price of Bitcoin multiplied by the number of coins in circulation. The realised capitalisation value is a lot less straightforward. Average value of each bitcoin is obtained by adding up all the individual prices of each Bitcoin when it was last moved (eg. movement from one wallet to another wallet is also included) and divided it across the number of Bitcoin involved. The realised capitalisation value is then derived from multiplying this average value with the number of Bitcoins in circulation. The whole idea behind this technical indicator is to identify periods when there is sudden high investor participation where market value is unusually high above the realised value. This metric has claimed to be able to pick the market high of each cycle within two weeks. In case you are wondering, we are still nowhere near the market high given this indicator. You can find out more about this technical indicator here.
So in case you are wondering if the recent dip in Bitcoin prices is good to pick up some Bitcoin for diversification, I think you might have the answer yourself now.
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