Are We Entering Accumulation?
It's been an incredible experience to have had the experience to learn technical analysis with the SC crew alongside a formal university education.
While it's a commonly documented phenomenon in the industry, something I've come to realize is the difference between how the industry approaches markets to that of academia. It all comes down to different objectives between the two and, more importantly, different measurements of success.
One great example to reflect the difference between the two is that finance professors will argue that returns fall under a normal statistical distribution. Meanwhile, those who trade for a living know that markets do, in fact, trend.
By extension, with trends come cycles.
The best visualization of market structure is this graphic by Brian over at alphatrends.net:
The graphic speaks for itself, but there are four distinct periods:
- Accumulation
- Uptrend
- Distribution
- Downtrend
It's funny, because when you overlay this with all the high-growth names (think your typical ARKK stock), it looks nearly identical:
Of course, Bitcoin and all cryptos are even further out on the risk curve. So, by extension, they too look similar to the textbook market structure.
With Bitcoin in recent years, there was an accumulation period in 2019. Following this, we experienced the relentless uptrend we all remember in 2020-21, followed by the distribution that began in May of last year.
Now we're firmly into the downtrend phase after breaking lower:
When placed in the context of Bitcoin's entire history, you can see how well Bitcoin's conformed to this textbook market structure:
Chances are, Bitcoin will do what it's done every time it's suffered a drawdown of this magnitude: It'll base for 12 to 18 months and break higher in a more favorable environment.
When dealing with drawdowns greater than 70%, there’s a certain amount of time that’s required to base, repair the damage, and absorb the remaining supply from all the bag-holders trying to get out.
Many traders have a subconscious bias that they need to be positioned in a trade, whether that be long or short.
This is far from the truth.
The ability to sit in cash for long periods of time is an incredibly advantageous skill. It prevents traders from getting chopped up in messy tapes and enduring significant drawdowns, something that’s particularly common for crypto.
Bottoms after severe crypto winters don't take weeks to form, they take quarters, if not years...
If you want your signal that we're likely entering into an accumulation stage, evaluating the realized price gives us great insight. As far as I'm concerned, this is THE crypto chart to be paying attention to.
From our work, there’s a strong argument to be made that for long-term investors, this represents an asymmetric opportunity to more aggressively dollar-cost-average and stack sats.
The best trade is not trying to catch the bottom or to sell the top.
Where many traders go wrong is that they try to predict, whereas an understanding of market structure adds certainty to your overall process. For the overwhelming majority of investors, the latter is far more important.
I think this is something even my finance professors can get behind.
So, what are your thoughts?
Are we entering into the accumulation market stage?
Or is the damage just getting started?
Was teenager Louis a bit too much of a nerd? Or does technical analysis make you a cool kid?
[hide_from accesslevel="all-star-charts-crypto"]If you enjoyed this post and want access to our premium cryptocurrency research, start your 30-day risk-free trial.
[/hide_from]