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Well, it’s been over four months since I last wrote about Bitcoin; congrats are in order if you went on that little ride with me.
You may recall my blog from Dec 2018, where I said the interim bottom was likely in at $3.2k. I also forecasted a full reversal and re-test of the pre-drop level of ~$6k. Four months later and here we are, approaching $6k ($5.6k as of this writing). My theory of an interim bottom and full reversal seems to have been correct, although the time frame has been a bit longer than I expected…as I was expecting it to take place in Jan or Feb. In hindsight, the time frame was a bit ambitious, as Bitcoin cycles are much longer now than in the past. Other than that, my reasoning seems to have been sound.
Where do we go from here? I’d like to dive into that.
There are many talented technical analysts out there, many of whom I’ve had the pleasure of interacting with. There are also many who are still learning, and that is great. Frankly, I believe that one should never stop learning, in any endeavor – technical analysis & trading is certainly not excluded from this.
There is, however, one aspect I feel that even the best traders of cryptocurrency are lacking in. It’s an area most may not even realize should be a much bigger focus in their overall trading approach & strategy. It’s an aspect some may not even realize exists. That aspect is Game Theory.
Oxford defines Game Theory as: “The branch of mathematics concerned with the analysis of strategies for dealing with competitive situations where the outcome of a participant's choice of action depends critically on the actions of other participants. It is: “A game of strategy – not of chance – that is concerned with the analysis of strategies for dealing with competitive situations where the participants try to anticipate each others’ actions and the likely outcomes of those actions.” (Market Business News)
Bitcoin price, for the most part, is controlled by the Elites (the mega-rich, groups of such, governments & institutions) – a small percentage of whom own the majority of it. Whether or not we want to accept this, it is true. The market cap of Bitcoin is simply too small for it not to be easily manipulated. Especially now with the paper trading (futures markets) of Bitcoin. So I’ll say it again, because this is important: Bitcoin price and direction are, for the most part, controlled by the elites.
Why is this important? It’s important because one can have a firm grasp of chart analysis principles and trend/price prediction….but this will only takes one so far. And without understanding the thought process of the elites, one will always be at their whim when trading Bitcoin (or any Cryptocurrency because Bitcoin direction controls the direction of the entire market).
This is where game theory comes into play.
If you’ve ever played poker for “big” (relative to the individual) stakes, or even just played the game for fun for many years, AND put a sizable portion of your money at risk in the game (this is important, because those playing without something to lose will not play prudently), then what I am about to say will make sense to you. If you haven’t, this strategy is still one that anyone can wrap their head around out if they put some thought into it.
In a poker tournament with, for example, 100 players, eventually the field of players will be whittled down to a final table of 9 or so. 91 other players will have lost all their chips by the time the tournament gets to that point. At the final table, let’s say you are the chip leader, with a dominant stack and you are in possession of 60% of all the chips at the table. Your 8 opponents are: 4 others with medium-sized stacks and 4 others with smaller stacks. Your objective of this game – and to win this game – is to get all the chips from your opponents.
I won’t get into the various strategies and scenarios that could come up for you to compete and win this game – there are too many. But the first and easiest route is to go after the smaller stacks. Bluff them, bully them, push them around. Make them think they have a chance by giving them some small wins or showing them some weakness. Get them excited, optimistic, confident, even overly-confident, and then wait for your chance. You go after these smaller stacks first because your chances of defeating them are greater; i.e. even if they get lucky against you the damage will be minimal. You only go up against a more formidable opponent if you have a significant advantage; a “made” hand (aka “the nuts”– the best hand possible, or a hand that is close to the best possible). Because to go against another big stack and lose would cripple you. Your strategy, first and foremost, is to isolate the smaller players and get their chips. Once you and the other “big stacks” have taken out the smaller players, the winnings divided among you, you can then turn to compete with one-another (or you can technically decide to just split the winnings).
This example is to show you that you (we) are the smaller stacks at the table. However, in this poker example, partnering with someone else at the table to beat the other players is illegal and against the rules.
In crypto, there are no rules and there are no regulations. You CAN partner with others to defeat your opponents.
That’s not to say that ALL of the elites are working together against the smaller players….although I do believe some are. This is to say that its more likely than not that some are.
It’s also more likely than not that there are other elite players in this game who are NOT working together. This is part of the reason that technical analysis and chart reading work so well for Bitcoin at this stage in its life cycle. The reason is that, while the elites are generally working together in the same direction with the same goal in mind (to take all your chips), they are not willing to “buck the system” by going up against another elite player and going against traditional technical principles. To do so would be too risky for them and could end up crippling them; so they are best served to just “go with the flow” the majority of the time. However, there are times and opportunities for them to tweak traditional principles, move the market against what “should” happen, and gain more chips. In trading, this is called “stop hunting” – or seeking out the places where longs and/or shorts have their stops set so they can get their "chips."
Hopefully you understand the poker analogy and have figured out how it might apply to you and your Bitcoin trading endeavors. Some of you may remember the crazy times in crypto from Jan 2017 – Dec 2017, when Bitcoin went from $734 at the low in January to $19,891 at the high in December. I can tell you that in the last few months of that year, there was a euphoria in the air about Bitcoin and crypto, and that almost anyone could make a lot of money with very little knowledge. This was leading up to one gigantic bluff, and the elites selling all their bitcoin to the average Joe at the top, and then short selling it.
I believe another such opportunity existed after the fall from $6k. That opportunity was to stop the fall prematurely at around $3k, allow a temporary bottom to form, and send the price back up. This is what I wrote about back in December. I went into parabola and bubbles in that blog, so there’s no need to repeat myself.
My expectation & prediction from December remains intact. It is based on technical analysis of the Bitcoin chart from 2014 – present and Game Theory. I still have not seen true capitulation and despair selling, nor have I seen enough volume come through on this rally to say that it is nothing more than a relief rally taken to the extreme. That could change of course. But as of this writing, I believe the next opportunity for the elites still lies at these levels, with the help of the mainstream media. That is when and where I expect the rug to be pulled out.
It is what I would do, if I were controlling the strategy.
Let’s pretend for a second that I am part of the elites (this will be more technical, so I apologize for that). After this last bubble, I knew a drop was coming and there was nothing anyone could do about it. The question wasn’t “Will $6k hold?” - the question was: “Where is the bottom?” I have always charted the approximate bottom to be in the 1.8-2.2k range (to be more exact would depend on when, exactly, buyers decide to step back in and that’s anyone’s guess). However, the best way for me to make more money (my mid-term goal), and to get more Bitcoin at cheaper prices (my long-term goal), is to put the brakes on part of the way through the correction & send price back up. If I can get price back to pre-drop levels – and even beyond that level (Stop hunting) - the level that THE ENTIRE WORLD knows is a significant resistance level, I will be able to encourage more people to buy.
I then set an enormous sell wall and Market Sell, at the right time, an order large enough for the whole world to notice. This will trigger a cascade of Stop Sell orders, further increasing the momentum down. It’s that momentum that I would count on to start the collapse to ~$2k – the spot where I’ve wanted to buy all their Bitcoin all along and the level that the rest of the world will likely jump in to buy. If I don’t think I can garner the power to send price past $5.8k, then I will just sell it all there and go short.
The way to know what the whales do is to watch the volume on the first major dump from that region ($5.7-6k). And there WILL be a dump. If it’s minor (relative) and price holds above $4.8k or so, then we can expect a push to ~$6.3-6.5k ish. If it’s major then that may be the start of the next true sell-off.
In all likelihood, if things continue to progress as I think they will, I will be looking to start a small short position around the first test of $5.7-5.8k. However, that is not something I would recommend doing for anyone. Shorting is only meant for sophisticated traders because, in theory, there is no limit to how much a person can lose (yes, a person can lose MORE than they actually have).
What I would suggest is caution around that area; there is nothing wrong with taking profit and reducing exposure. If this plays out the way I think it will, the opportunity of a lifetime could be waiting around $2k – my final bottom target, for now. If I’m wrong, and Bitcoin does push through the $6-7k level, there will be other, safer places to enter, and that’s what I’ll be doing in that event.
I hope you enjoyed this and appreciate you reading.
Update: I literally finished this blog and posted it to the website just an hour before news came out that the New York Attorney General is suing Bitfinex - one of the largest and oldest cryptocurrency exchanges - alleging that their "stable coin" Tether (a coin allegedly pegged to the US Dollar) is fraudulent. This is something most of us in the industry have suspected for years (I've tweeted about it several times). The timing of this news is not coincidental, as Bitcoin is nearing critical levels. I had expected a major FUD news event to help with the collapse, but also thought they would let Bitcoin get to ~$5.8k before releasing it (it got as high as $5650). Close enough. Will this be the catalyst to send Bitcoin to new annual lows? I think so. But only time will tell. Thankfully I sold all of my cryptocurrency yesterday (also tweeted). For now, I am short.