On the bitcoincharts.com "technical analysis" and overconfidence

[Vandroiy]

I have developed a certain fear of prices that de-couple from the actual market size.

There exists a well-known view and forecast on bitcoincharts.com "technical analysis", which now represents a wide-spread view on the future of the BitCoin economy -- though with some disagreement on the meaning of the expression "long-term".

Edit: I have noticed I should be more precise with my words. My criticism does not concern the technical plots and figures concerning past data, but the forecasting and some commenting on future goal prices. The author has shown to be more sensible than I first thought, and the differences mainly concern the psychological impact on a nonchalant reader. However, I still believe the effect this post covers should be given more attention. See the discussion below.

I'll be blunt. I don't like the forecast provided, and I believe the kind of thinking applied might be a problem for all of BitCoin at this moment: overconfident BTC owners, showing no fear of creating a bubble, meeting sceptical demand and low trade volumes. Now don't get me wrong, I love the bitcoincharts website. It is my favourite source to be up to date. Excellent data gathering and display! I hope the owner will not be offended to be used as the most prominent example of what I call a problem. But overconfidence has brought many crises in the history of economy, and it might be worth to avoid notions down that path. Let me explain.


What is wrong with the forecast? No rally after all?

I do not know future prices. If anybody would, he could get rich very quickly. What I can do, is telling when a forecast is implying a certainty it cannot really provide. Long time forecasts are generally highly profitable; when a big player actually believes one of them, it instantly becomes a self-fulfilling prophecy, because the first to move can reap most of the profit. Therefore, real forecasts of such kind are either kept secret, cannot be applied productively, leave out crucial risks, or don't differ from wild guesses.

Now, I would like the glorious RALLY to happen as much as many people here. But I must point out that the market itself has agreed that we do not know the future as a fact; more than that, even high-risk traders appear fairly sceptical. So why do people love claiming certainty? Because they want this to happen. Whoever believes in the forecasts helps raising prices, hopefully creating a feast for someone who intends to sell later. But this raise in price is speculative in nature, it's backed only by the forecast -- not the kind of rise everybody likes to see.


Why is this a problem?

We have a systematic bias in the kinds of people who buy and sell BTC right now, and what they see when they read a fairly well-known page that leans toward a bubble. Miners, from what I have seen, tend to believe this forecast -- or at least like it. Hey, everyone likes a forecast that brings him profit. The market depth on mtgox neatly shows the result: high expected prices.

The typical speculator, however, will read the text and think two things: The author tries to get rich by manipulating the market, and has no problem posting a kind of forecast that might be considered too optimistic. They fear a bubble. The outcome can be low trade volume, since demands fails to rise, yet sellers refuse to lower prices. What I currently see strengthens that fear; isn't the daily amount of generated coins higher than the volume traded for currencies? Young system or not, this is not a sign of healthy trading.


Please don't misunderstand. I think there is great potential in BitCoin, and I don't know the future either. But right now, this market is still fragile -- we should not risk starving it out. I would much prefer a slight drop in price now to a bubble-type deflation that bursts in a single sale that just overpowers demand and leaves everyone but a single seller dumbstruck. This scenario is in buyer's minds.

Maybe it's not good to live on the sole expectation of rising prices. Yes, it is a fast path to profit, but then again it might bring additional risk. Especially if everyone is systematically overconfident.

So I have the wish to the author: please moderate your tone, and stay with facts the market has agreed on. If you believe in a glorious future for BTC so much, start buying yourself, and back it with all your might -- but there is no reason to try to generate a hype, except if you don't truly believe your words and intend to be the one who profits on the downfall. Your blog is influential, read by many people right now. You may be driving them into dangerous territory.


Yes, this is a double-edged sword. The belief in the value of BTC is important, and confidence is important. I don't condemn hoarding BTC, I might keep some from my trades as a high-risk speculation myself, when I finished the thoughts that started this article. But the confidence from BitCoin users right now reached a point where people seem to have forgotten they're doing high-risk trading on a juvenile commodity. Miners, BTC-accepting businesses and early adopters alike share the expectation of an imminent rise in prices, and hold on to the coins as if they were gold already, while many speculators still stand aside and shake their heads.

BTC is not gold yet. Forgetting that may be more dangerous to its long-time value than admitting it.


My words included, please keep in mind that we don't know the future. We should remember the mistakes of large markets in the past, and keep in mind that the BTC community consists of many people who think alike, with many being from the technical and few from the financial sector. A systematic bias among the first adopters might generate problems that are not intrinsic of BitCoin, but of its current users.


Thanks for reading. I now have to finish thoughts for myself, and decide how to act. I hope that others, too, finish their thoughts before adopting an oversimplified model that might endanger not just their own outcome. I wish that I will soon see a market fluid enough to give the feeling of buying at market price -- right now, after seeing the discrepancy between trying to trade here in EUR and on mtgox, I wonder whether anybody even cares about a real market price, now that so many focus on the all-or-nothing "super-value versus breakdown" expectations.

Everybody trading here should have seen two bubbles burst on a global scale, both driven by rising prices and both having a counterproductive outcome for the vast majority participating. We should know better than repeating past mistakes.


In hope of many trades on a vivid BitCoin market,
Vandroiy

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[jgarzik]

Most people know that bitcoins are, in investor lingo, "very high risk."  There are any number of well known collapse scenarios that can occur while bitcoin is small.  So I would not assume that "major players" in the bitcoin community are putting a lot of stock in a particular technical analysis.  Technical analysis is a well-known tool for analyzing price movements, but it clearly does not account for external forces such as "someone shows up one day to buy $1million in bitcoins" (or sell a similar amount).

 

[Stephen Gornick]

So I have the wish to the author: please moderate your tone

So you are looking to buy and want a lower entry too, eh?

[nofuture]

It's technical analysis which is just a probabilistic forecast.  It's helpful for the day trader or for those of us who aren't actively trading but like to think we are following a horse race.   But it doesn't predict anything with certainty.   Anything can happen in trading.   S3052 is still calling it a RALLY because BTC/USD is still above the red trendline which seems to be a support that BTC/USD is tracking over the long-term.     That's all he means when he says we are in a RALLY.     It's seems like the BTC/USD value got ahead of itself early in the year with the rocket boost and is now trading sideways to catch some breath.  


Remember people thought facebook was just a college website in 04 and now it's worth $85 billion on its way to valuation the size of Apple by 2015.  Bitcoin is worth $5 million from zero after 2 years in the wild.    Give it some more time.    

[Matt Corallo]

I somewhat agree with the OP.  I have to say applying a purely technical analysis of the bitcoin market right now is not very appropriate, especially as the market is so small and controlled by people who don't follow the standard rules of buying/selling that occurs on more regular markets (many people want to support bitcoin and buy for that reason more than anything).  That said, I think the model proposed by the S3502 (long term rally to high targets) is valid if we see more markets for bitcoin develop (as in more merchants accepting it). 

[Vandroiy]

@S3052:

Thank you for including my core statement and posting some clarifying words that distinguish forecast from technical analysis on past chart movements on your site. If there is a problematic effect, displaying the nature of the discussion alone should help.

(Though I kind of dislike how you try to then shake off the argument and my credibility using an a posteriori analysis of a correct trend forecast. But I guess that's the way such public discussions go.)

As to the -- admittedly not completely false -- accusation on my intentions for this thread:

So you are looking to buy and want a lower entry too, eh?

Partially correct. I am considering buying, but my concern has little to do with marginal price changes. I want to see higher trade volume!

Whether I buy some newly created commodity at arbitrary price A or B within a small price range makes close to no difference. But if that commodity shows off an alarming market state, it's value goes down independent on some price people can still enforce "on paper", meaning on the few active trades. Large buyers do not believe in the current price; nor do large sellers! That I have not bought large amounts of BTC should be proof enough that I, too, am uncertain what I am looking at. I would be a fool to dance around a few cent in price if I expected a continuing rally to 5$ or 10$ realistic and probable; do your math on what chances I'd need to jump on.

I'm sharing this thought because I believe there exist miners who have such large amounts of BTC that lowering the risk of a breakdown by dealing at a lower-than-currently-expected profit margin might be profitable for them in a statistical sense. Think about it -- their expected profit is enormous right now. Loosing some of it, even risking bursting a bubble, may be worth it if some psychological effect of it raises trade volume, securing the future value of BTC. Of yourse this is in my own interest, but that does not mean it's bad for them. Remember that trade is not a zero-sum game, not by a long shot, and especially not on emerging markets.


I don't want the technical analysis to stop! All I want is a reminder to people: not all market movements are in scope of a chart analysis. We are dealing with many newcomers to financial trading. A wise man once said: a trend is a trend -- until it stops. My complaints are not about faults within the technical analysis page, but shifting attention away from the threat of what happens, even if this is rare, if it becomes wrong.

S3052, I hope you will remain right. It is not within hopeful fantasies of mine to jump around telling people "told you so" after seeing a crash. I want to trade in BTC, after all.


Finally: I don't make a mystery out of where I stand. I don't want anyone to feel that I twist my words for my own profit; please read anything I write with care if you expect I do so unconsciously. As I understand it, I shouldn't be able to profit from market shifts I cause by writing, unless they are temporary, so just think things through.

[S3052]

@bitcoincharts owner S3052:

I am not the owner of bitcoincharts. I am independent. tcatm is the owner and has asked my if i would post my analysis there which I happily accepted.

Thank you for including my core statement and posting some clarifying words that distinguish forecast from technical analysis on past chart movements on your site. If there is a problematic effect, displaying the nature of the discussion alone should help.

(Though I kind of dislike how you try to then shake off the argument and my credibility using an a posteriori analysis of a correct trend forecast. But I guess that's the way such public discussions go.)

I really like your comments, and I did not want to create the perception that you are not credible. After seeing you posting more than the first thread, I see that you have expertise and I like the discussion. For perspective, we had a couple of newbees there trying to create scam-type of threads very often. But you are not one of them. I have revised my blog to not put you in the wrong spotlight. Hope this is fine now.

I would be a fool to dance around a few cent in price if I expected a continuing rally to 5$ or 10$ realistic and probable; do your math on what chances I'd need to jump on.

This is what I am saying, we are on the same page. Currently, the market is in a sideways range and it might not be very wise to buy now within this congestion area. You may wait for a clear breakout. If a breakout happens, the upside is quite big, because as you say, the market is tiny and if significant funds flow in, it is not irrational to say that 2,5,10$ can be reached fast (10x higher). Recall when prices were in the 0.065$ congestion area in September 2010: Within 6 months, prices increased 15x.

[Vandroiy]

I am not the owner of bitcoincharts. I am independent. tcatm is the owner and has asked my if i would post my analysis there which I happily accepted.

Ah. Sorry for the confusion; I will edit that post to prevent this wrong information from spreading. I should have read more carefully.

I really like your comments, and I did not want to create the perception that you are not credible. After seeing you posting more than the first thread, I see that you have expertise and I like the discussion. For perspective, we had a couple of newbees there trying to create scam-type of threads very often. But you are not one of them. I have revised my blog to not put you in the wrong spotlight. Hope this is fine now.

Thank you, I really appreciate that! It's very refreshing to talk with someone who can calmly discuss even when criticized. Possibly, our differences are subjective in nature; the question being how much expectation of a new large increase in price "shimmers through". I don't doubt your analysis or data on the past charts. The problem lies with what people think who currently possess BTC. In the end, this might be more of a psychological question, since nobody has given probabilities for any predicted outcomes. And I don't dare do that right now, the situation is just too unpredictable.

(...),
we are on the same page. Currently, the market is in a sideways range and it might not be very wise to buy now within this congestion area. You may wait for a clear breakout. If a breakout happens, the upside is quite big, because as you say, the market is tiny and if significant funds flow in, it is not irrational to say that 2,5,10$ can be reached fast (10x higher). Recall when prices were in the 0.065$ congestion area in September 2010: Within 6 months, prices increased 15x.

I, too, believe that this could happen again, but just like the first time, it needs an external effect and a certain market condition. I think the requirements on these are much harder now, but can be met if either BitCoin can reach a wider audience or someone throws money at it. I would very much prefer the first case, as I find it less dangerous.

As I see it, the first massive rise happened after BitCoin popularity rose very suddenly due to Slashdot reporting on it for the first time; this kind event even has it's own name, the Slashdot Effekt: http://en.wikipedia.org/wiki/Slashdot_effect My interpretation of the first rise is that the rise in popularity created a fast rise in demand, which sellers were slow to realize. At the time, the exchange market was still smaller in terms of non-BTC currencies. The first spike comes from people who want to jump on the new trend early; the following decline is caused by miners who noticed the price rise with a delay and decide to sell -- partially caused by most of them waiting whether the price might increase even more, only beginning to sell after some time passed.

My point of view is only slightly different from the one you take, it aims at the same events. In fact I just know too little about experienced effects on young markets to make statements from price charts. But this simple model of demand and effects of sudden changes therein is very powerful. Large-scale speculators will not accept a steady, predictable development for fear of concurring traders, and jump in as fast as they can to accelerate it until the predicted final state is reached. This is probably what you mean when you say "clear breakout", as opposed to the stagnation due to the current lack of another such event.

But, looking at it this way, the trouble of low trade volumes with constant creation of BTC should make the market nervous, because right now, large quantities of BTC remain unsold. The possible effects of trades by both big miners and rich investors grows large in such a situation, because the trading market is not accustomed to large trade quantities. This is bad because people are reluctant to raise prices at the risk of a sudden, steep drop. And, independent of who moves first, prices might bounce like a rubber ball if fear enters the game, and nobody knows who might end up winning or loosing after things settle again -- or where the real price would turn out to be.

Constant trade activity can serve as a buffer against such anomalies. That is why I think a higher trade volume is crucial for stability, and that holders of large amounts of BTC should consider the entire market depth rather than just a daily price that currently cannot be upheld for big sales. Of course, persuading buyers to accept the higher value demanded might serve the same purpose, as long as sellers don't just continue the game at the new price level.

[N12]

Very interesting discussion, thanks for this thread. I cannot make a real statement though, as I am torn apart myself and have little trading/investment background. On the one hand, I think that funds are almost certain to come in at some point as Bitcoin is indeed a brilliant idea once understood. On the other hand, it’s a bit like waiting for a stimulus and if it doesn’t come, uncertainty follows.

Therefore I suggest we invest in creating "real" demand by getting bigger shops and organisations to accept Bitcoin. This would be much healthier in my opinion, as it would create a long-term growing demand which we are lacking at this moment.

[Vandroiy]

Therefore I suggest we invest in creating "real" demand by getting bigger shops and organisations to accept Bitcoin. This would be much healthier in my opinion, as it would create a long-term growing demand which we are lacking at this moment.

I totally agree. This would have two desired effects: increase trade volume and solidify a minimum value. The best cure for the current situation. But making this happen on a larger scale is not easy at all.

[N12]

But making this happen on a larger scale is not easy at all.

I disagree. Once a few move, a chain reaction will ignite. We recently got Wuala to accept Bitcoin for example. Although Bitcoin is not directly linked on their site, it gives a pretty good discount for the current Bitcoin price. More of this and I am certain that it will spread and gain more prominent places as demand grows.

[molecular]

Therefore I suggest we invest in creating "real" demand by getting bigger shops and organisations to accept Bitcoin. This would be much healthier in my opinion, as it would create a long-term growing demand which we are lacking at this moment.

I'm totally with you and I think the original poster will likely agree, as he said himself:

I am considering buying, but my concern has little to do with marginal price changes. I want to see higher trade volume!

When I read that, I was tempted to reply with something like "Then buy already, man! That'll increase the volume... if everybody waits for more volume to be traded, we're going nowhere". Then I realized the only thing driving real demand (as opposed to speculator's demand) for BTC will be real offerings of stuff for BTC (as opposed to the speculator's hope of rising value).

That's why I'll continue working along the lines of above-mentioned thread trying to convince established dealers and organizations I do business with or (want to) support to use Bitcoin.

What has worked best so far was telling people I loved what they did and that I would like to donate some Bitcoins to support them and ask if they could please publish an address so I could send them money. Of course once they do, I actually donate.

Money must flow!

[nofuture]

I agree we need more investors AND we need more actual business activity on bitcoin. 

ONE problem with bitcoin is that it is TOO brilliant.  Most people can't understand it and we need average joes to start using it at some point to make it work.      They'll only get involved when bitcoin reaches a critical mass in that people will accept it on trust alone.   They'll never trust it based on reading the Bitcoin technical paper because it is too difficult to understand.   But they don't have to.  If they knew all the machinations that went into making USD work they wouldn't trust it but they do.   
 

[spooderman]

just dropping in from the future to say hi, and that the BTC price is in the three digits now

[S3052]

@bitcoincharts owner S3052:

I am not the owner of bitcoincharts. I am independent. tcatm is the owner and has asked my if i would post my analysis there which I happily accepted.

Thank you for including my core statement and posting some clarifying words that distinguish forecast from technical analysis on past chart movements on your site. If there is a problematic effect, displaying the nature of the discussion alone should help.

(Though I kind of dislike how you try to then shake off the argument and my credibility using an a posteriori analysis of a correct trend forecast. But I guess that's the way such public discussions go.)

I really like your comments, and I did not want to create the perception that you are not credible. After seeing you posting more than the first thread, I see that you have expertise and I like the discussion. For perspective, we had a couple of newbees there trying to create scam-type of threads very often. But you are not one of them. I have revised my blog to not put you in the wrong spotlight. Hope this is fine now.

I would be a fool to dance around a few cent in price if I expected a continuing rally to 5$ or 10$ realistic and probable; do your math on what chances I'd need to jump on.

This is what I am saying, we are on the same page. Currently, the market is in a sideways range and it might not be very wise to buy now within this congestion area. You may wait for a clear breakout. If a breakout happens, the upside is quite big, because as you say, the market is tiny and if significant funds flow in, it is not irrational to say that 2,5,10$ can be reached fast (10x higher). Recall when prices were in the 0.065$ congestion area in September 2010: Within 6 months, prices increased 15x.

indeed, it is fun to see what happened after we were writing this..

[Pab]

BTC price prediction is very very hard,i think it will grow before halvin in early 2016 than drop

at what price it will goes,my opinion between 600-800
much more important for btc to stabilize price,than it can very gradually go up
 But if inflation will arrive to westerness countries,central banks will dont know what to do,it can be a kind of panic,thhat moment btc price will grow,pure speculation from my side