This post is a bit convoluted so there’s a TLDR at the bottom in bold. For the record, I didn’t base this on any reading or external sources, this is mostly just from my daydreams during the day. So I am definitely not too confident about this and am looking for some critiques.
So I was thinking today about the moving averages and was fascinated with how the 9 day moving average seemed to be acting as resistance on the 4 hour chart. This got me thinking about some questions. What is a moving average precisely? Why does a moving average have the price it has?
Well, the MA is the average of prices at which bitcoin was sold for over the a particular timeframe. OK, but what does that mean? What physical events does a moving average represent?
To help me think about what sort of physical events a moving average represents, I decided to use an analogy. Let’s say we’re not talking about bitcoin, let’s say we are talking about apples. Let’s say there’s a market with lots of rekt bitcoin traders apple sellers and the apple sellers sell their apples at different prices to buyers. The price of the apples goes up and down based on number of buyers and sellers.
Very intuitive so far, but what’s a moving average? Well, a moving average is the average price the apples sold for in the past on the day you were buying the apples. So let’s just say you buy an apple at this market every day. Assuming you didn’t literally calculate the moving average for the price of apples, your monthly moving average is just your general sense of how expensive or cheap the apples were in the month or so. But there’s an important nuance. Most importantly, the moving average is your general sense of the past price of apples without taking into account the overall in price over time. Ie: assuming your memory of the apple price was just the average price without any sense what the prices were in a particular month or season, then you would be remembering the moving average.
So what does this have to do with bitcoin? Well, replace apples with bitcoin and that’s basically what a bitcoin moving average is. It’s the market’s “memory” of the past bitcoin price without any sense of the variation in price over time.
Now, here’s where things get interesting. According to this market memory, what was bitcoin’s price in the past four years? The market’s answer is given by the 200 week moving average, which is 3300. But why does the market think the average price in the past 4 years is 3300? Why is it 3300, as opposed to 6k or 600?
The reason why is because the primary influence on the market’s memory is the giant surge of buyers in 2017, which pushed the price up past what the average previously was. You can see it by looking at how steeply the average rose in 2017.. There’s no way the market would be anywhere close to where it is now without that surge. Because this memory the market has doesn’t include variation, it “thinks”, in a sense, that the typical price in the past 4 years was around 3k (even though it wasn’t even close to that price most of the time) because it is anchored by the surge in buying interest that the market experienced in 2017.
So can we expect the price to stay above the moving average? Well, the fundamental cause (the surge of buyers) that influenced the moving average above 3k are no longer present. Therefore, I think we can expect the price to dip below the 200 week ma, and I think it’s pretty obvious from recent price action that this is where we are going. But the real question now is how long are we going to stay below the 200 week MA? The answer, I think is simple: to get back to the moving average, we would need a ratio of buyers to sellers similar to what the market “remembers” there being in the past 4 years. And since the moving average is at the level it is at due to the surge of buying interest in 2017 we basically need to recreate a ratio of buyers to sellers similar to what there was in early to mid 2017. (And there is a counterargument which I address in comments.)
So when are we likely to have that ratio of buyers to sellers? Essentially, similar to the bet I made in a previous post, by betting the price will go above the moving average in, say 2019 or 2020, you are effectively betting we will have a similar ratio of buyers to sellers to the ratio we had in 2017 at some point in 2019 and 2020.
I think it is likely we will not have that level of interest any time in 2019, and probably not for much of 2020. It thereby follows that we will likely spend quarters 2, 3, and quite possibly 4 in 2019 and quarter 1 of 2020 below the 200 week moving average, meaning that until 2020, the price will not rise above 3k. This also implies a sub 2k bottom, possibly in the low 1ks and possibly a later bubble due to the next halvening (2022 instead of 2021).
TLDR: the main influence behind the 200 week ma is the surge of buyers in 2017. That means that if we dip below it, we will need a similar surge of buyers that we saw in 2017 to get above it. This is unlikely in 2019 and 2020. Therefore we will spend most of that time below the 200 week ma.
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