RESEARCH NOTE 30 July 2022
A Bitcoin Price Oscillator Executive Summary
Bitcoin may be at a cycle low, based solely on its historical performance. This finding is based on maximum drawdown from detrended highs.
The oscillator presented can provide insight into past price behavior and correlations to other asset classes. That said, it is not necessarily predictive of future performance.
Bitcoin’s price cycles are more consistent with that of equity, and least consistent with that of gold. This undermines the argument than bitcoin can serve as a digital commodity that offsets other macroeconomic risks.
Oscillators and Cyclical Indicators An oscillator is a technical analysis tool that constructs high and low bands between two extreme values, and INTEREST RATES https://www.investopedia.com/articles/stocks/09/ how-interest-rates-affect-markets.asp
that asset values move inversely with interest rates is a tautological foundation of finance.
This research note presents one possible method of objectively identifying long-term market cycles. Though bitcoin is the focus of this study, the methodology can be applied to almost any asset class.
Methodology This metric combines two individual components: an upside component (0 – 100%) and a downside component (0 - -100%). 1 The metric is convenient because it displays long-term cycles on a scale of -100% to +100%. It is important to note that this indicator is not a model and may have only limited applicability to forecasting. Instead, it is best to consider this approach as a means to view two historical observations as a single presentation.
Preliminaries Every oscillator must start with a trendline. Regarding the subject of this Research Note, this trendline must use prices from the low end of the range, and not use any method which approximates a centerline trend. We use the Lowest Price Forward methodology described in Peterson [2019] and Cane Island [2020]. For reasons described later, it is essential to use the longest possible price series. Nominal (as opposed to real) values are preferred, as is the highest level of granularity (e.g. daily).
Upside Component [Chen, 2022]. The literature on economic and market cycles is extensive, but the most well-known is that of Professor Robert Shiller at Yale who has developed extensive research on multiple markets (Campbell & Shiller [1988, 1996, 2000]). The difficulty exists in presenting objective metrics of peaks, valleys, and the duration of each cycle.
The trendline price at time t (Px )is calculated such that ln(𝑃𝑃𝑥𝑥 ) = 𝛽𝛽√𝑡𝑡 + 𝛼𝛼
where β and α are terms found by regressing ln[min(Pt,…, PT)] against √𝑡𝑡. Next, calculate the deviation from the trend as