A Maturing Market

Dear Readers,

It will be the aim of this fortnight’s article to illustrate the way in which there is nothing too alarming at all in the price action of the current BTC market. Rather, with the notion of a maturing market, we should view it in terms both of normality and opportunity. The critic might rush in here to state this as something akin to a ‘coping mechanism’, trundled out ad hoc after the event, to explain why the market hasn’t performed and lived up to previous expectations. And the critic would have a point… if indeed such an explanation were introduced ad hoc. The fact is however that this notion of a maturing market, and its relevant predictions for price, were stated quite some time ago… indeed, even well before the previous peak of the market. Further, if price predictions that stretch back years [backed by a macro theory] were confirmed by subsequent and recent price development, then would not further predictions based on the same theory be weightier than the current more pessimistic prognostications of the day, ones which are too often just reactionary to the shorter-term move?  

The idea of a maturing market is tied to the idea of an increasingly liquid market, and may be summed up in the following points that are relevant to BTC price action:

• Diminishing returns [currently observed]
• Diminishing/ irregular cycles [arguably yet to be observed]
• An eventual level of price discovery [relative to the radical volatility observed previously]

In the course of this article, I’ll first review past references to this notion of a maturing market, and in turn look at the current chart with this notion in mind. Some might think such speculations on models and theories are irrelevant to the realities of the market, but in my opinion they are crucial. For the fact is that the theory we have in mind structures what we see, or how we interpret [Kuhn’s paradigm].  Where some will see doom and gloom given one paradigm, others will see opportunity given another.

1] Past References to a Maturing Market

In a hot market, at the half-way point of the run-up to what became the subsequent peak, I wrote the ‘Cycle Theory Revisited’ article, which clearly elucidates the idea of a maturing market. A snippet:

On the chart, the ‘cycle’ seems to be breaking up just as giant ice-sheets would in warmer waters. Nor should this surprise us in the face of a general principle, where a maturing market and increasing liquidity is understood to lead to reducing [macro] volatility - the single major volatile spike [and correction] may be broken up into a series of more minor volatile spikes [and corrections]. And so it is that the increased liquidity of a maturing [and very speculative] market suggests a re-visiting of what has to be the current ‘orthodoxy’ of cycles. The nature of all such questioning remains exploratory and theoretical [see Hedging article for further on this], and so should not be the cause for strong disagreement at the hypothetical level - all we can do is make provisional statements in regard to the future, and then wait to see what develops - whether those theories are falsified/ invalidated or not [Popper]. Any strong disagreement to a theory usually arises from its ‘unorthodoxy’ - the dominant paradigm, or the ‘normal’ science/ theory [Kuhn] that is generally accepted will naturally be defensive. The new idea will seem almost unintelligible, for it’s only by the prevailing theory that we interpret [and make intelligible] otherwise random phenomena as intelligible. Such are the facts of collective human behavior. Perhaps first a quick sketch of the dominant paradigm, that of the four year cycle, is required in order to more clearly perceive an alternative.

Where the above article dealt with an alternative theory/ paradigm [given that the mass of market participants were subscribed to the theory of a standardized 4 year cycle/ blow off top], the following article [Bear Market or Correction] focused on price prediction. The macro point of the article was that should the market see a continued correction, it would be ‘Bitcoin normal’ within the parameters of a model denoting a maturing market. And this at a time when the general sentiment was still bullish [or became even more so on the subsequent second peak].

If however, the participant here just viewed the current development as Bitcoin normal - a healthy correction of a speculative parabolic spike up - then a further correction would just be seen as that; a correction as opposed to the horror of a prolonged ‘bear market’. It was with this developing nature of the market in mind, where a more mature and liquid market would lead to shorter boom and bust speculative episodes, that a previous article was written. The basic idea being that a more liquid and mature market, on its path toward price discovery, would make redundant the older [and orthodox] notions of grand multi-year bull and bear markets [with blow-off tops]. If the market has moved on, why not the ‘narrative’.

Price at the time of writing the above article is marked on the following chart [notice momentum lost on the monthly MACD]. And what a distance we have come since then - in terms of both price and sentiment. In the second section, I’ll look at the current chart in the context of the previous prediction as described above.

2] Current Chart of a Maturing Market

And so we come to the chart today that has largely played out according to the theory Note that the curves of the LGC [logarithmic growth curve] channel, as seen on near all charts, have remained unchanged since 2018. If such price action to the bottom of the channel was predicted to eventuate while price was still at the top, would this not strengthen the case for buying at the bottom now that price has arrived there [what I’ve termed the buy zone]? With this rational idea of a maturing market in mind, there is nothing abnormal or fearful about price being where it is. Given that of course there is also no certainty that the model/ theory of this maturing market will continue to play out, the savvier investor gains exposure while also remaining hedged.

Zooming out, we see clearly the trajectory.

In my opinion, the reason why it has so far traced almost perfectly a geometric path of an LGC is because this pattern in price reflects the mass of market participants motivated by the speculative instincts, or the animal spirits, which are at one time greedy and at another time fearful. Human nature is the constant that forms the pattern [and what is a markets but a mass of participants]. I’ve often written about this aspect of the market which is somewhat opposed to the idea of markets being rational and efficient. Markets can be just as ‘foolish’ as they can be wise. This is something I covered in more detail in the article ‘On Sentiment: The Madness and Wisdom of Crowds’.

And yet I think there is a third interpretation here, a third way. It is an all too common trait of human nature to fall into one interpretation or the other. In this binary world, markets must either be perfectly efficient and rational, or completely irrational/ sentimental. I’d suggest instead that the nearer truth is something of a mix between the two. Markets can be both rational and irrational, both wise and foolish though at different times [just as human nature can be, and markets are simply an aggregate of this, buyers and sellers]. If we allow that markets can be rational, and then become irrational for a period of time, we can start to discriminate between high and low prices, that corresponds to high and low sentiment. We can then start to look at the sentiment indicator as inversely related to optimal or rational buying, and as an aid in buying less indiscriminately.

The concept of a maturing market involves process and transition to a qualitatively different kind of market. Quantitative [quant] analysis is all very fine, but if the focus [interpretation] is purely data-driven it may simply look for a repeat of what has come before. And though of course technical analysis is in large part based on patterning there should be allowed also the import of wider forces that may serve to ‘warp’ the pattern… just as gravity in Einstein’s physics is understood to warp Newtonian space. Relativity not absolutes.

A maturing market also serves to explain what appears as an anomaly in the minds of many- why is it that the 200 moving week average no longer functioned as a support, with price remaining below it for an extended period? If we take increasing maturity/ reducing macro volatility/ eventual price discovery as our model, that is, as our interpretive apparatus, then this is no longer an anomaly. In fact, according to the model, this very long term average should be broken as support and come to function more as a mean of price… as an average around which long-term price action would oscillate. I’d go far as to predict that the 200 MWA will move upward eventually to the mean of the channel [dotted orange] with the bottom of the LGC channel [based on diminishing returns and an eventual relative plateauing of price] itself becoming future support.

Conclusion

Having discussed the notion of a maturing market [one that had been predicted, and one that has largely played out], I think investors here have a rational model on which to base their investment decisions. Of course, a rational model does not exclude uncertainty, for the most rational approach always allows for uncertainty and so is also hedged. Besides the price action of a developing logarithmic growth curve being grounded in the speculative activity of the conglomerate, I think it also represents a nascent currency in the process of capitalization [price discovery]. Those worried about the ‘macro’ and deflationary forces of one kind or another would do well to consider that BTC is an alternative currency [digital gold] as well as an asset. Indeed, as mentioned a few times in previous articles, the lower band represents deflation expectations… as the upper band does inflation expectations. If anything defines the current state of conventional currencies, it is instability… of which Bitcoin is a beneficiary.

Until next time,

Stay [relatively] safe out there,

Dave the Wave.

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