The behavior of Bitcoin has recently puzzled traders and hodlers again. What should they do with the world's first cryptocurrency? What strategy to follow? According to the researcher of the main cryptocurrency exchange strategies, the answer is unequivocal: hodl. Why he made such conclusions and how the low volatility of Bitcoin in recent days may affect his relationship with the regulators is reviewed in our article.
Why It Is Best to Hold
There are many different tools that can help get a relatively accurate prediction of Bitcoin prices. But the main snag in the study of the most useful and valid methods lies in the fact that they do not have enough empirical scientific data. Because of this, we can draw only the simplest conclusions about the justification of our technical analysis. There is a possibility that even if you trusted some technical analysis methods and made a profit, you were just lucky. And it is possible that in the case when your predictions failed, your technical analysis is correct. How can this be? The fact is that market processes are probabilistic in nature, so we can make predictions only with a certain percentage of accuracy, which can never be equal to 100. Judging by empirical data, the Bollinger Bands can be an effective indicator to use for Bitcoin price analysis.
In 2017, crypto enthusiast Joris Bakker conducted a study in which he tested some stock trading strategies. The main objects of the study were:
Support and resistance rules are an attempt to determine the levels below (above), which, apparently, have a fall in price (increase). These levels are called the level of support and resistance, respectively, and are often defined as a local minimum and maximum. The rationale for support and resistance levels is that investors tend to sell (buy) at a peak (low), which will lead to a price increase (fall) above (below) the previous high (low). The breakthrough of the support (resistance) level is considered as a trigger for further price movements in one direction, therefore, a trend signal is generated that follows the sale (purchase).
The on-balance volume is an indicator calculated based on the data of the trading volume. It is important that in the method of its calculation it does not have an averaging model, and, therefore, is an indicator synchronous with the price, and in some cases even a leading one.
Filter rules track trends, buying (selling) currency when it rises (falls) by a certain percentage after the last low (peak) value. The filter rule is defined as follows. If the price of a foreign currency (Bitcoin) exceeds its last minimum by a predetermined threshold of x percent, use the local currency (dollar) and buy a foreign currency (Bitcoin). When the price of a currency moves down, at least in percent of the subsequent maximum, make a short sale of foreign currency and buy local currency with revenue. The position is maintained until the price of foreign currency does not exceed its last minimum by x percent again, after which the above strategy is repeated.
Moving average rules is a strategy that tries to track trends and identify the inevitable. Unlike filtering, moving average trading strategies are aimed at smoothing volatile time series.
Channel breakout occurs when the price moves out of the channel determined by the minimum and maximum for the previous n time intervals. A channel occurs only when the maximum of the previous n time intervals is within x percent of the minimum of the previous n time intervals, excluding the current price.
Bollinger Bands are a set of lines on which two standard deviations (positive and negative) are built from a simple moving average price of a security. Bollinger Bands, developed by well-known technical trader John Bollinger, usually have two standard deviations from a simple moving average, but can be adjusted to suit the user's preferences.
Each of the presented trading strategies was compared with the usual hodling strategy.
The results of the study showed the greatest efficiency of the Bollinger Bands, ensuring the greatest profit in the five-minute interval. This strategy worked well with price deviations up and down. In general, the Bollinger Bands showed the best performance in periods of greatest volatility. Bollinger Bands were effective only when using many small price fluctuations.
Nevertheless, due to transaction costs, all long positions are losing compared to the control strategy of buying and holding. Thus, trading with the Bollinger Bands is an effective strategy, although no more effective than a buy and hold strategy. “Although profitable individual trading strategies were identified, some technical trading rules used separately, as a rule, cannot predict all price movements. Since the choice of only one strategy leads to the loss of available information generated by the remaining strategies, we are developing a neural network classification algorithm that combines trading signals or the positions of several individual trading rules into a complex trading strategy. The new combined strategies outperform the most successful individual trading strategies and benchmarks based on performance indicators and break even transaction costs,” sums up Joris Bakker in his study.
Thus, profitable trading based on technical analysis is likely to be suitable for machine learning algorithms, and not for twitter predictors. And, despite the effectiveness of some of them, it is obvious that on the basis of the data obtained it can be concluded that the good old hodling remains the best strategy.
Low Volatility + Regulators = Love
It is worth noting that the behavior of Bitcoin, which traditionally demonstrates a high degree of volatility, has undergone major changes over the past few days. This can also be regarded as an indicator that the hodlers are on the right track. According to Highcharts, the Bitcoin index of volatility for the last 30 days was only 1.73 percent, and for the last 60 days 2.58 percent.
Regulators will also likely see a positive sign in Bitcoin price stabilization. “The low volatility is also a statement that price manipulation has perhaps abated,” said FXEmpire financial expert Bob Mason. “After wild swings and rollercoaster rides, Bitcoin looks to have settled into a long-term relationship with its investors, who are not speculating their days away and appear to be in it for the long haul.”
In general, unsustainable Bitcoin pricing could be one of the main factors that prompted the SEC to refuse ETF petitions.
For example, the SEC document, which explains the second rejection of the Winklevoss Bitcoin Trust application for trading the first Bitcoin ETF, states that traders can manipulate prices on the Gemini Exchange due to low trading volumes.
"The impulse evaluation of Bitcoin led to speculations regarding the assessment of the future value of Bitcoin, making it extremely volatile," the document says.
Thus, the low volatility of Bitcoin is beneficial only for inveterate risky traders who are ready to play on sharp price hikes of various coins, but regulators and hodlers can remain calm. The former has the opportunity to adjust the legislative base, and the latter may not worry about their assets.