Friday, October 12, 2018

Why is walking the only way out when bitcoin volatility is low?

Why is walking the only way out when bitcoin volatility is low?

Why is walking the only way out when bitcoin volatility is low?


The behavior of bitcoin has recently again puzzled traders and hodlers: what to do with the world's first cryptocurrency? What strategy to follow? According to the researcher of the main exchange cryptocurrency strategies, the answer is clear: to walk. Why he made such conclusions and how the low volatility of bitcoin in recent days can affect its relations with regulators, understood in our material.


Why is walking the best?

There are many different tools for obtaining relatively correct prediction of bitcoin price. But the main snag in the study of the most useful and valid methods lies in the fact that they do not have enough empirical scientific data. Because of this, we can draw only the simplest conclusions about the fairness of our technical analysis. There is a possibility that even if you trusted a particular technical analysis and you made a profit, you just got lucky. And it is possible that in the case when your predictions failed, your technical analysis is correct. How could that be? The fact is that market processes are probabilistic in nature, so we can make predictions only with a certain percentage of accuracy, which can never be equal to 100. Judging by the empirical data, Bollinger bands can become an effective indicator of the exchange analysis of the value of bitcoin.

In 2017, crypto-enthusiast Joris Bakker conducted a study in which he studied some stock strategies. The main objects of study were:

Support and resistance (Support and resistance rules) — an attempt to determine the levels below (above), which, apparently, have a fall price (increase). These levels are called the support and resistance levels respectively and are often defined as the local minimum and maximum. The rationale for the support and resistance levels is that investors tend to sell (buy) at the peak (low), which will lead to an increase in the price (fall) above (below) the previous high (low). The breakthrough of the support (resistance) level is considered as a trigger for further price movements in one direction, so a trend signal is generated, following the sale (purchase).

Average value of the balance (On-balance volume) is an indicator calculated according to the trading volume (Volume). It is important that in the method of its calculation it does not have an averaging model, and, therefore, is synchronous with the price indicator, and in some cases — even ahead.

Filtering strategy (Filter rules) — tracks trends by buying (selling) currency when it rises (falls) by a certain percentage after the last low (peak) value. The filter rule is defined as follows. If the price of a foreign currency (bitcoin) exceeds its last minimum by a predefined threshold of x%, use the local currency (dollar) and buy a foreign currency (bitcoin). When the currency price moves down at least % of the subsequent high, make a short sale of the foreign currency and buy the local currency with the proceeds. The position is maintained until the price of the foreign currency exceeds its last minimum by x% again, after which the above strategy is repeated.

Moving averages (Moving average rules) - a strategy that tries to track trends and identify the inevitable. Unlike filtering, moving average trading strategies are aimed at smoothing volatile time series.

Channel breakout-occurs when the price moves outside the channel defined by the minimum and maximum for the previous n time intervals. The channel occurs only when the maximum of the previous n time intervals is within x% of the minimum of the previous n time intervals, excluding the current price.

Bollinger bands-is a set of lines on which two standard deviations (positive and negative) from the simple moving average price of a security are built. The Bollinger Band, developed by well-known technical trader John Bollinger, usually has two standard deviations from the simple moving average, but can be adjusted to the user's preferences.

Bollinger Bands. Source.

Each of the presented trading strategies was compared with the usual hodling.

The results of the study showed the greatest efficiency of Bollinger bands, providing the greatest profit in the five-minute period. This strategy worked well with price deviations both up and down. In General, Bollinger bands showed the best performance during the periods of the greatest volatility. Bollinger bands were only effective when using many small price fluctuations.

However, due to transaction costs, all long positions lose compared to the control strategy of buying and holding. Thus, Bollinger bands-an effective strategy, although not more effective than the strategy of buying and holding. "Although it was determined beneficial to individual trading strategies, some technical trading rules used separately, as a rule, can not predict price movements. Since choosing only one strategy results in the loss of available information generated by the remaining strategies, we develop a neural network classification algorithm that combines trading signals or positions of several individual trading rules into a complex trading strategy. The new combined strategies outperform the most successful individual trading strategies and benchmarks based on performance indicators and break — even transaction costs," concludes Joris Bakker in his study.

Thus, profitable trading based on technical analysis is more likely to be suitable for machine learning algorithms than for Twitter predictors. And, despite the effectiveness of some of them, it is obvious that on the basis of the data obtained, it can be concluded that the good old hodling remains the best strategy.

Low volatility + regulators = love

It is worth noting that in the behavior of bitcoin, traditionally demonstrating a high degree of volatility, there have been serious changes over the past few days. This can also be seen as an indicator that the hodlers are on the right track. According to Highcharts, the bitcoin volatility index for the last 30 days was only 1.73%, and for the last 60 days — 2.58%.

Regulators are also likely to see a positive sign in bitcoin price stabilization. "Low volatility is also an indicator that price manipulation may have decreased," says FXEmpire financial expert Bob Mason. "After a wild roller coaster ride, bitcoin seems to have established long-term relationships with its investors, who seem to be with it for a long time now."

In General, the unstable pricing of bitcoin could be one of the main factors that prompted the SEC to abandon the ETF petitions.

For example, the SEC document, which explains the second rejection of Winklevoss Bitcoin Trust's petition to trade the first bitcoin ETF, notes that traders can manipulate trading on the Gemini Exchange due to low trading volumes.

"The impulse evaluation of bitcoin led to speculation about the future value of bitcoin, making it extremely volatile," the document says.

Thus, the low volatility of bitcoin is beneficial only to avid risk traders who are ready to play on the sharp jumps of a coin, but regulators and traders can be calm: the first has the opportunity to establish a legislative framework, and the second can not worry about their assets.