Last updated on October 13th, 2017 at 12:15 am
This article is the second part in a 3 part series on how to conduct proper Bitcoin price analysis. In the first part, we discussed the proper economic methodology that should be applied to price analysis. We concluded that the doctrine of positivism should not be used in Bitcoin price analysis, or economics in general, as it ignores the core foundation of all economic activity: human action. The correct approach to take when conducting economic analysis is the praxeological method. This method treats all economic activity as a consequence of human action. Individuals act to remove felt uneasiness, human action is the basis of all economic activity, and humans are governed by the rules of logic. Therefore, all economic activity can be analyzed using deductive logic. Economists can look at the means employed by an individual who is pursuing a definite end and determine the necessary logical outcome of the means employed. No econometrics or statistical models are needed.
In this article, we will go over the actual process of conducting Bitcoin price analysis. We will identify the various types of news that have the largest impact on prices, how to identify trends—and the difference between long-term and short-term trends—we will discuss the importance of Bitcoin price trends and price floors, and we will go over when we should be conducting price analysis.
What kinds of News have the Largest Impact on the Bitcoin Price?
If we, correctly, employ praxeology in our Bitcoin price analyses, then we should immediately begin looking for major news stories that could have possibly caused the change in the price that we are attempting to explain. Since all economic activity comes from the actions of individuals, and news is the documentation of the most recent and relevant of those actions, then news certainly has a definite impact on the market.
Positivist analysis fails to understand the importance of news because they are enamored with the idea of empirical examination and mathematical models. That obsession is why they aways fail to accurately forecast the future Bitcoin price trajectories. They simply do not understand the causal connection between developments in the market and the demand for bitcoins.
Praxeological analysts will have no problem identifying the causes of Bitcoin price changes, however, because they know what information to look for; they go straight to the headlines to find out what is causing the shifts in the market.
But what kinds of news affect the Bitcoin price the most? Surely, any old news story about Bitcoin would not have a huge impact on the market. The types of news that have significant impacts on the Bitcoin price are news pieces regarding major, global companies accepting Bitcoin coming from the mainstream media or a huge piece of Bitcoin related news coming directly from a community news website. Examples of these kinds of important news stories would be the recent EBA report, Dish Network accepting Bitcoin, Ghash.io attaining 51% hashing power, or the Silk Road Bitcoin auction. Pieces of news, such as these, that serve as a milestone in the history of Bitcoin’s growing legitimacy have large impacts on the Bitcoin price. The stories must be about something that could potentially bring a fundamental change to the Bitcoin community.
Regular, day-to-day news, regardless of whether or not it is positive or negative, generally has a minimal impact on the Bitcoin price. For instance, the weeks after the Silk Road auction have contained nothing but good news for Bitcoin. Yet, the price has remained sideways ever since the auction excitement died down. This is because the news stories that have been circulating through the community have been of minor importance, there has been no major, mainstream news coverage of a government ban or of a multinational company accepting Bitcoin.
One redditor has recently made the mistake of expecting every little piece of good news to have a huge upward pressure on the Bitcoin price. This person pointed to the steady stream of good news following the Silk Road auction and noted how it has had no impact on the price. Of course, a person using the praxeological method of analysis would understand that the news must be of a certain quality in order to exert any pressure on the price, so clearly this person has no understanding of the causal connection between news developments and market demand for bitcoins. We should ask this question to that one redditor: if news developments are not the cause of changes in the Bitcoin price, then what is? Is the Bitcoin price something that is independent of human action, is it an organism all on its own? Of course, the answer to this question is a strong and confident no. Human action without a doubt determines the demand for bitcoins because it is humans who are demanding them. News is merely a description of the most recent actions taken by individuals. So it is only logical that prices are affected by developments in the news.
In summary, news is the most powerful determinate of changes in the Bitcoin price. For it is the documentation and communication of actions committed by individuals. The reports of those actions influence the decisions of other individuals; this process turns into a chain reaction that produces noticeable shifts in the Bitcoin market. Only the most influential actions have large impacts on the Bitcoin price, so the most important pieces of news are those that cover major players in the Bitcoin community or cover breakthroughs—or setbacks—in mainstream adoption.
Identifying Long and Short-Term Trends and the Importance of Price Floors
Identifying the pieces of news that are affecting the Bitcoin price is of utmost importance, but making sense of these price changes is of equal importance. The entire purpose of price analysis is to identify short-term trends and make, hopefully accurate, speculations about the future direction of the Bitcoin price. So how do we go about identifying these trends?
First, we must make a distinction between a long-term and a short-term price trends. A long term trend can be either the lifetime trend of an asset’s value or the yearly trend. Short-term trends are anything that are more immediate than the yearly or lifetime trends, i.e. trends that occur on a monthly or weekly time-line. Long-term trends are used to judge the overall health of an asset, whether or not it is a good long-term investment. Short-term trends are used in—obviously—short-term investments. Day trading and short selling are two examples of activities that are aided by the identification and analysis of short-term trends.
Bitcoin price analysis is mainly concerned with the price changes that occur on a more immediate timespan; price analysts look at the establishment of new short-term trends, divergence from old trends, and possible projections for the extent and magnitude of the newly established short-term trends. Therefore, we are not overly concerned with the shifts in long-term term trends. Although very important, the study of those trends are more for historical purposes rather than investment.
How do we identify one of these trends, when is it established, and when is it broken? A new trend is set when a price floor is established, below which the Bitcoin price cannot fall. If the price does fall below that floor, then the trend should be considered broken and a new, downward trend has been established. Once a price floor has been set, the trend will either be upward-facing or sideways, depending on the news. As long as the price floor has not been broken, the trend should still be considered in tact. This practice allows for the dips in price that frequently occur to happen without breaking an established trend. Additionally, it prevents us from falling into the fallacious assumption that a new trend is established with each movement of the Bitcoin price. So, as long as the price does not fall below the current hard floor of $450, we are still in the upward trend that was established in May. Inversely, a downward trend is broken when the price rises above an established wall. Not much needs to be said here because all of the same principles involved in identifying a downward trend apply, just in reverse.
This discussion on trend identification brings us to our next point, price floors. A Bitcoin price floor is, as mentioned above, a point below which the price cannot fall without breaking the trend. However, price floors are much more tricky to identify than any general trend. This difficulty exists because price floors can be established without necessarily being tested; in other words, we can have a price floor without ever actually seeing it. The floor could be $600, but the price stays consistently above $630. But these “invisible floors,” for the lack of a better word, are of little importance for investment purposes. The really important price floors are the hard and temporary floors that have been tested by the market and are clearly visible. A hard floor is the absolute bottom of the trend. In our current upward trend, the hard floor is somewhere around $450. Temporary floors are points below which the price will not fall as long as a stream of good news persists. The difference between the two is that negative news can break a temporary price floor but will not necessarily break a hard price floor; it would take a serious piece of bad news—such as a governmental ban on Bitcoin—to break a hard floor.
Trying to identify price floors is a fairly difficult task and is not very rewarding overall. It is far easier to simply look at the weekly or monthly price charts, they will very clearly depict the prevailing trends. And that is essentially all that empirical charts are useful for, providing a descriptive, visual aid to the analyst. So, the only necessary features of a price chart are, obviously, the price, and a volume metric. All of the other indicators and models are time consuming, confusing, and provide no value to praxeological analysis.
Only Conduct Bitcoin Price Analysis at the Proper Time, do not try to Analyze the Price too Often
The last piece of advice that will be provided here is this: do not attempt to conduct Bitcoin price analysis too often! One of the many pitfalls of positivist price analysis is that they try to make predictions about the Bitcoin price almost daily. They over-analyze the market because they are too concerned with metrics and indicators, they do not pay attention to the shifts in the subjective valuations of individuals.
At the most, price analysis should be conducted once a week. Even then, many of your weekly analyses would be short reports about sideways action or price fluctuations caused by normal, day-to-day activity on the exchanges. People will buy and sell their bitcoins because they, for whatever reason, have changed their valuation of Bitcoin and prefer to have more or less of it. There is not really any way to measure those changes in valuation besides asking each trader why they are buying and selling—which would be a daunting task and would not produce very much useful information. Try to stick with writing an analysis when there is huge movement in the Bitcoin price, when it is clear that a major news story is having an affect on the price, or when a steady stream of good or bad news over a period of time is affecting the current price trend. Your task as a praxeological analyst is to take information that seems obvious, like major news stories, and comment on how this information is affecting the markets and how it could affect them in the future in ways that are not so obvious.
The information provided in this article is really all that needs to be considered when writing a Bitcoin price analysis. Yes, it is a very simple process overall, yet it can provide very valuable information. In summary, the things needed for a proper Bitcoin price analysis are: an identification of significant news stories, the identification of short-term trends, and an accurate definition of price floors—and walls, when dealing with downward trends. By applying the praxeological method of analyzing human action to this information, we can describe movements in the markets with precision and make accurate predictions for the future of the Bitcoin price.