The cost of relying on TA within unregulated crypto markets

Bitcoin, Ethereum and other Crypto related communities post lots, and lots of TA articles on a daily basis.  For those familiar with mainstream assets, TA may seem perfectly reasonable and many spend hours every day analyzing the numbers.  But, what does it all mean in crypto?  Seems to be not that much really.

TA may work in certain markets where trade has become centralized and the amount of money needed to move the market great.  Crypto is not that forum.  Crypto is distributed and fragmented over 100’s of exchanges across countless countries and timezones.  Unlike traditional markets that have had many decades to combine, crypto markets are just emerging.

What the fragmentation means is that you do not need insane amounts of money to move the market in one direction or the other.  Exchanges all hold order books that are independent of other exchanges and as we have seen in the recent years, a few million market order may take out the entire book on almost any of them.

Last year we saw the Ethereum flash crash on Coinbase / GDAX.  A market sell order was placed that took out the entire order book and created a chain of events that liquidated leveraged positions and triggered the stops.  The price of Ether dropped to .10 USD for a few seconds and then rebounded instantly creating new crypto millionaires in the process as those with $1.00 buys saw their buy orders execute.  Coinbase dealt with the issue and reimbursed many that lost out.  However, that situation illustrates the problems with fragmented markets as well as a reliance on traditional TA.

Point is that that using traditional methods to predict price movements in non-traditional markets may be a losing game.  Does it work? Sometimes.  When people rely on those figures to trade, you can bet that at times you may see a correlation only because others may be using the same analysis tools.  In recent months, we have seen it work, just enough to suck others in.  When enough movement has been created, the trend suddenly reverses, and many are left scratching their heads.

Fact is that this is an unregulated market that works as a free-for-all where almost anything goes.

At any point, any large holder (and there are many of them) can sell off what they want and announce it on public channels.  They can tell all their friends to sell, they can start internet pump-n-dump groups, they can discuss why a project will fail or why it will pump, they can do whatever they want and TA be damned. Practices that are not legal in traditional markets are good to go in crypto.  Starting a PUBLIC pump-n-dump group for stocks will get you jail time, in crypto it’s OK. Truth is, many of the huge movements within lower cap coins are in fact pump and dump schemes, many of which are posted to FB, Reddit, community groups, etc, in hopes of getting more people on board.

As long as everyone operates in an unregulated market where insider trading is not a concern, plans to artificially inflate prices are posted to Twitter, and groups announce which coin they will be manipulating next, traditional TA will struggle to get it right.  The assumptions made by technical analysis are based on rules that do not exist in an unregulated market where 10% to 20% volatility is a norm.

What about all those prediction platforms that seem to get it right?

You gotta love the prediction apps in crypto. Do they have correct predictions? certainly.  Why wouldn’t they.

If you offer a service which is an expensive monthly charge, you would imagine that people with a good amount of crypto may subscribe.  Some of those services are quite expensive and most likely not what small investors would pay a fee for.  What happens when you send emails out to a bunch of wealthy subscribers telling them so and so coin is about to pump?  hmmm, they may buy in.  So if you have enough subscribers with lots of cash and they all buy in on your “prediction,” – the “prediction” becomes a self-fulfilling. You tell 100 people to buy a coin as it’s about to pump, 100 people put in millions, collectively moving the price up, catching others along the way who are hopping on board that money train.

Pump and dump groups are frowned upon.  PND groups do not care about TA.  They say “here is the plan to manipulate the price of blah blah.” Prediction platforms are considered completely legit as they reinforce the “here is the plan to manipulate the price of blah blah” with some technical analysis that may, or may not mean anything.  At the end of the day, the lines between the two are quite blurred and until we begin to see consolidation within the exchange markets, TA may mean what people want it to, period.

So if TA is not to be relied on, what can new crypto enthusiasts do to predict the market?

Like many have learned, not much.  There is no way to predict which way the market will go as crypto does not play by traditional rules.  In traditional markets, there exists a basis for predictions.  A company reporting earnings above expectations, creates a basis for valuation.  Crypto has none of that.  Crypto is a speculative market and most valuations are based on supply/demand. Cryptocurrency is not a stock, it does not represent equity in a company that posts earnings and therefore should not be treated as such.  The price is simply what someone will pay to buy it from you.

At the end of the day the only rule that matters is rule #1 of crypto…. only bet(invest) what you can afford to lose.

For those wondering how Bitcoin works, check out The Economics of Bitcoin & Crypto Explained By Stanford Professor Susan Athey