Bitcoin Storm Tracker: March 6th 2021 Weekly Recap and Projection

TL;DR -

• Currently in a holding pattern due to macro economy, but upwards pressure is building. No quantitative predictions in the bullet points this week.

• If there is an ATH by April, we can expect a euphoric rise in the April-May timeframe, otherwise we may enter a more laid back market until the Fall.

• The next few weeks are critical for the macro picture. Bitcoin still looks poised for takeoff, but hedging might be a good idea if Fed rates increase.

I would like to remind readers this post is a purely educational exercise. I’m fitting models based on data and am probably wrong. Don’t construe this analysis as investment advice, I am not an investment advisor and you should seek one out before making decisions with your money.

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The Forecast

This week, the price action has been fairly boring, and there have been no real surprises. There could be short-term downside, but we’re holding the high $40k level so far on average with a slight trend up. The model predicts this upwards trend could accelerate, but there’s a greater macro environment to be aware of, which I discuss below. Therefore, while the forecast chart looks optimistic, there’s reason to be cautious. Note that some price trajectories (in gray above) show sideways movement for the next month are very possible.

Analysis: Recap

The forecast actually looks quite similar to last week, however it does look like upwards pressure is building. There has been some “rising rates spookiness” in the macro market, and prices of everything are throwing a fit. As discussed below, these macro factors have converged in a manner unseen since November, but this time seems even more dramatic.

If the Fed goes brrrrr¹, then the rocket ship just might be about to launch.

If the Fed raises rates to control inflation all bets are off. This past week, stimulus troubles and rising bond yields in anticipation of inflation has thrown cold water on our ignition system. I recommend this great article to for a way to hedge.

Critical Date

We’ve been tracking the critical date for the last few weeks. When this date stabilizes, and the chart above “flattens out” and converges on a small set of dates, this can provide an advance warning of market capitulation.

So far, the chart seems to be oscillating between November 2021 and June 2021, suggesting that unseen factors seem to be pushing the market to have either a euphoric rise in April-May or later in the Fall. As discussed last week, there seem to be two outcomes the current bull market is flipping between, and macro factors could influence which scenario actually plays out:

1. Short-term Overheating: Recently, the model suggests the price action is consistent with overheating. We’re in a temporary consolidation zone, and then the price will skyrocket April-May with extreme euphoria. This points to a top between $100k-$200k (actual number is anyone’s guess) before the end of June.

2. Short-term Consolidation to repeat Fall 2017: If we consolidate for the next weeks to months, the market will cool down enough and we could coil up for a run in the Fall, similar to what happened in 2017. In this case, we can expect a slower rise through $100k over the summer and then a wild dash past $200k+. Under this scenario, I think talk of the “super-cycle” could drive the price to wild heights I dare not predict. But Bitcoin is here to surprise us.

Both scenarios are at the mercy of the greater economy, and this brings us to the even more speculative discussion below.

Analysis: Model Error Trends

Models never tell the complete picture. One way to show this is to chart the “residual error” of the model, that is the difference between the predicted and actual prices. Since we really care about percent error rather than absolute error in price, it is better to examine the model residual by looking at the difference of the logarithm of the predicted and actual price, however I show both versions above. As the actual price goes higher, we expect the residual error to also increase, the chart to the left attempts to account for this effect.

In practice, I use an autoregressive error model, AR(1), to filter out slow oscillations in price. When I plot the residual without AR(1) as in the charts above, there appears to be a structured pattern in the residuals, suggesting there might be something else not accounted for in the current model.

Back in November and more recently, the actual price has underperformed the expectations from the model. For the reader, this means it might be prudent to discount current estimates. But what is happening? I blame the macro economy.

Philosophy: Macro Market Cycle Spookiness

If we compare the residual error plots to the Nasdaq over the past 6 months, it appears deviations in the model also seem to show up in equities, particularly tech stocks. This might indicate Bitcoin is correlated with the equities market, but what is causing this correlation?

We’ve been operating in a weird speculative environment where any hint that the Fed will stop printing money spooks investors. If the Federal Reserve increases rates to combat inflation, investors know high P/E stocks (e.g. Tech) will not do well. Early November, the US election cast doubt on future spending, and most recently vaccines, stimulus, and states reopening has stoked inflation fears. I’m no macro expert, but I believe Bitcoin is correlated with Tech stocks, not because either is driving the other, but because both Bitcoin and Tech are driven by the Federal Reserve. I linked it above, but this great article explains the situation better than I ever could. Most of the well known “macro for the common man” people, like Raoul Pal, are also thinking in similar terms.

That said, I’m starting to think about how to feed this into my model. At the very least, it should help figure out how to interpret the model in the short term. While Bitcoin was built to fight inflation, the chaos inflation can cause in the markets will not necessarily be good for Bitcoin in the short term.

Long term, Bitcoin adoption should increase and its value along with it, but for the current storm formation, this is a space to watch.

That’s it, thank for reading!

1. The technical term for keeping assets up by printing