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A scientific guide to Bitcoin market sentiment

Posted by: Yoyokuo 2021-05-26 Comments Off on A scientific guide to Bitcoin market sentiment

Bitcoin performance is a bit crazy

When I released this chart, there were a lot of comments saying that it was too early to say that the Bitcoin bubble burst. With Bitcoin’s volatility so volatile, anyone with a clear mind will not use Bitcoin to price transactions. Bitcoin is full of controversy, and blockchain technology is even more so. Although Bitcoin has attracted a lot of loyal users, there is still a long way to go in positioning it as an asset worth investing in.

However, the cryptocurrency world will one day lead the way. The S&P 500 index fell sharply at the opening. Traders witnessed the tragic baptism of cryptocurrency. After that, Bitcoin staged a spectacular rebound.

The market has always been linked to emotions. When it comes to this, I have to mention Elon Musk, the number one “emotional player” in the currency circle. But even if we take into account Musk’s hype on Bitcoin and the high market sentiment he caused, we cannot justify such a large-scale sell-off and rebound. Mood swings are always present in the market, but they are rarely so strong or so rapid. So, in what way should we explain the market phenomenon? Can the future be predicted?

The curse of IPO

Throughout history, IPOs usually occur when they are confident in the market. When large private companies believe that market conditions are in line with their needs, they will begin to seek a public listing. Users can also get some inspiration from it.

Coinbase is the largest digital currency exchange in the cryptocurrency field. When it went public last month, Bitcoin was almost at its highest price. This chart shows the changes in stocks and cryptocurrencies since then:

I don’t think the supporters behind Coinbase have any inside information, but they can distinguish situations that are beneficial to them. From the previous example of the IPO curse, we have witnessed the decision to go public in the spring of 2011 by Glencore Plc, the largest commodity trading hegemon and the largest producer in the international copper industry. At that time, the Bloomberg Industrial Metals Index reached its highest one week before the stock issuance. It is worth noting that in the following 10 years, neither the metal price nor Glencore’s stock has reached the level of the public listing day.

To cite another example, the private equity fund company Blackstone Group (Blackstone), this company is relatively advanced in the development of the concept of private equity. Such acquisition companies benefit from high stock income and cheap debt. However, just before the global financial crisis, the Blackstone Group went public in the summer of 2007. At that time, anyone who bought a stock during a public listing or the S&P 500 would have to wait until 2013 to see its huge capital gains

Elon Musk’s “performance” is an after-dinner talk in the currency circle. His argument against Bitcoin on environmental grounds has received widespread support, although he should have been aware of this problem long before he started holding cryptocurrencies. But we should not move our attention away from the Coinbase show. The curse of public listing should be paid attention to.

Prepare for regulation

If Coinbase’s public listing is a market “signal”, it indicates that Bitcoin is ready for a cyclical plunge, but it did not provide any clues for the recent crash, and supervision can. Bitcoin is able to stir the heartstrings of users, largely because it is a substitute for legal currency. Like gold, it may be able to maintain its value without being affected by government measures.

The problem is that government legal currency can both create and destroy currency. Governments of various countries have a monopoly on currency issuance and are unwilling to lose the dominance of currency. This is one of the most serious “bearish” points for Bitcoin, which also gained a lot of new support during the hours of the crash. China has also reported that payment and credit financial institutions have been banned from accepting Bitcoin, and in the United States, the new currency supervision commissioner of the Treasury Department, after taking over the position of the people recruited by the Trump administration from Coinbase, announced that it will pay attention to cryptocurrency. Review of regulatory policies.

Acting audit officer Michael Hsu stated that the review is not a declaration of war on cryptocurrencies. He made it clear that he believes that the future of fintech companies can be expected, but the situation that the current easing policies may change is not welcomed by Bitcoin investors.

However, it is no coincidence that after China’s new attitude towards cryptocurrencies was released, the market began to experience extreme selling. The picture below is from Charlie Morris of ByteTree Asset Management in London, which divides the Bitcoin transaction model into transaction time zones dominated by Asia, Europe and North America. We don’t know when exactly who sold it, but this trading time zone can help us:

Red represents Asia. In recent months, the Asian market seems to be the first to buy Bitcoin, while the US market has seen a net sell-off. It is not surprising that bad news in Asian time zones caused the crash.

Has the limit of the bubble come?

Are there any basic principles that can be used to calculate the reasonable value of Bitcoin? Morris experimented with this and suggested some interesting measures. Assuming that the value of Bitcoin is a network, the more users, the more valuable it is. Morris proposed a set of value standards in 2013. It is worth noting that the reasonable value currently set by the model is approximately US$40,000. This price is close to the normal market price. In this market, an asset is over-hyped, fell, and then over-inflated, prompting buyers to enter the market. It is ridiculous to try to explain all the explosive fluctuations of Bitcoin from the perspective of reasonable prices.

Morris also studied the global transaction fees generated by Bitcoin from another perspective. The study found that the capacity of the system is limited, and when more people conduct transactions, the handling fee will rise to keep the transaction volume under control. Another sign also shows that although Bitcoin’s numbers and concepts are excellent, there are still many technical problems before it becomes a mainstream currency.

When Bitcoin reached its peak, transaction fees soared and then fell sharply. Perhaps this is another measure that people can use to measure the future progress of an asset that has no built-in value and no return:

If there are tentative methods to measure the technical level, then there are also tentative methods to measure sentiment, and sentiment is undoubtedly the main factor driving Bitcoin transactions. Peter Atwater, who analyzes the social sentiment that affects investment patterns for Financial Insyghts, believes that Musk and Barstool Sports founder Dave Portnoy are the other biggest supporters of Bitcoin , The quarrel between them implies that the top of Bitcoin is approaching. In the process of the market going up, everyone has enough funds, so they will not catch up with each other. The dispute between Dave Portnoy and Musk defines a scope for this market. Now, in order for one to win, the other must lose.

Musk’s later appearance in the entertainment show “Saturday Night Live” attracted several weeks of attention, indicating that the Bitcoin phenomenon has exceeded the financial market. If there is a moment that marks the peak of market sentiment, it is this moment. There have been a lot of videos on YouTube telling people how to create their own cryptocurrency. Even the talk show also quoted news materials about cryptocurrencies such as Dogecoin. Regardless of the advantages of Bitcoin itself, it is obvious that it will inevitably be used by some malicious people in the process of being watched. When you think that money is easy to make, it is never a good sign.

But is the limit of the bubble coming? The answer is diverse. Bitcoin has formed at least three classic bubbles in its short history of development. It crashed by 80% or more each time, and recovered after a few years. If we compare Bitcoin’s most recent peak with the 12 months before the last high in December 2017, we can see that this market frenzy seems to have calmed down a long time ago. After the last obvious bubble burst, it can also be revived and hit a new high:

What hint does this bring us?

Based on existing indicators, I guess that another wave of Bitcoin’s surge has peaked, and it may take some time before it can reappear last month’s high. Given Bitcoin’s ability to regain its strength, it is too early to say that the bubble burst. Whether Bitcoin truly becomes a part of the global financial system, or even an indispensable part, will depend on how many people use it and how tolerant central bank governors are. Although Bitcoin continues to develop, in the end its value will match the price people are willing to pay for it. The fate of this digital currency may still be related to the risk appetite of the entire society. Regardless of Bitcoin’s trend, we can expect other risky assets to develop in the same direction.