Is Bitcoin Due For A Comeback?

Pile of gold Bitcoins

There’s been a mix of sentiment across the cryptosphere where Bitcoin’s going to head following the recent steep downturn we’ve experienced. Since its June 26th peak, Bitcoin’s had a 45% drawdown which is not an uncommon magnitude of correction in the crypto market.

Many of us are used to such moves but it’s not always clear whether we’ve experienced the true bottom. While no one can know this for certain, we can take a look at a number of factors using technical analysis and quantitative analysis to get a better idea of where Bitcoin is heading.

What Happened Last Week

To recap what happened last week, we saw the value of Bitcoin increase and surpass the losses endured during the previous week. While there was some pullback toward the end of this week, the overall move turned out bullish for Bitcoin.

Here’s a quick look into the performance and risk metrics we saw during the week of October 7, 2019:

Metric Expected Weekly Value Actual Weekly Value
Total Return 1.72% 6.88%
Volatility 9.44% 7.14%
Sharpe Ratio 0.141 0.932
Max Drawdown -1.78% -3.78%

The models expected a positive week for Bitcoin and that’s what we got. While the models were accurate in terms of direction, magnitude is clearly off and we also expected a bit more volatility than was realized.

Interestingly, the models expected half as much drawdown as was experienced while also estimating higher volatility. This points to a model that assumed fewer shock events and a more smoothing out of risk over the time horizon.

In terms of the time series expectations, it appears that Bitcoin fell within 0.5 to 1 standard deviation from the expected values while finishing off the last few days well within 0.5 standard deviations.

Bitcoin prediction intervals with actual time series

In terms of the daily performance estimates, the models were able to correctly forecast the daily direction 5 times resulting in a 71.4% accuracy.

Below you’ll find the estimated daily returns versus the actual daily returns during the week of October 7, 2019:

Day Expected Daily Return Actual Daily Return
Monday (10/7/19) 1.29% 4.41%
Tuesday (10/8/19) -0.42% -0.28%
Wednesday (10/9/19) -0.26% 4.9%
Thursday (10/10/19) 0.68% 0.04%
Friday (10/11/19) -0.46 -3.71%
Saturday (10/12/19) -1.02% 0.47%
Sunday (10/13/19) 1.93% 1.12%
Bitcoin prediction intervals with actual time series

If you were to have implemented the Model Direction Strategy, which is simply buying Bitcoin at open (midnight UTC) on the days where the daily return is estimated to be positive and closing your position the next day’s open (midnight UTC) when it’s estimated to be negative, below are the results you’d expect for the week of October 7, 2019:

Strategy Total Weekly Return Weekly Volatility Weekly Sharpe Ratio
Model Direction Strategy 5.62% 6.02% 2.16
Buy and Hold Strategy 6.89% 7.78% 0.89

Overall, last week’s outlook appears to have overestimated volatility while underestimating total return and maximum drawdown. On the bright side, the models were able to accurately forecast the upward-moving trend while keeping the actual price within 0.5 to 1 standard deviation of the expected price over the entire week.

What Might Happen This Week

This is an exciting week for Bitcoin because, hopefully, it’ll give us a hint to where it’s moving trend-wise over a longer-term time horizon. On a technical level, September experienced some bearish weekly moves which many (including myself) hope will be reversed this October.

Technical Analysis

Looking at the technicals of Bitcoin’s weekly and daily charts, we’re definitely in the positive for this month. It’s also bullish to see last week’s gains erase the previous week’s losses.

Based on the weekly chart, Bitcoin tested the Fibonacci 0.5 level at around $8600 last week and had some pullback. It would certainly be a bullish move if Bitcoin not only surpassed that point, but closed above it.

Bitcoin weekly technical chart

When considering the daily chart, Bitcoin was clearly in an upward trend last week. While it currently appears to be stuck in a sideways trend the last few weeks, Bitcoin continues to put pressure on some key resistance levels (Fibonacci 0.5 and others) and has made higher lows in recent days.

Bitcoin daily technical chart

Quantitative Analysis

Peering into the quantitative analytics of where Bitcoin might move this week is equally, if not more, important to the technical analytics. With a healthy mix of technical and quantitative analysis, we can take positions in the market that present observable patterns while backing those positions with hard numbers.

As usual, the models were tested across over 100,000 possible scenarios Bitcoin could take in the coming days, which showed the optimization process found rather robust and consistent model parameters.

Below you’ll find the performance and risk metrics the models expect during the week of October 14, 2019:

Metric Expected Weekly Value
Total Return 3.58%
Volatility 15.9%
Sharpe Ratio 0.142
Max Drawdown -0.31%

Based on these values, it looks like Bitcoin has the potential for a choppy week that generally moves it’s way upward. What’s really surprising is how small the models expect the maximum drawdown to be. While the volatility looks larger than last week – indicating a higher difficulty to estimate future values – the overall profile seems in-line with what we got from the chart technicals.

Here you can see the prediction intervals along with the expected values the models have for Bitcoin for the week of October 14, 2019:

Bitcoin weekly prediction intervals

The chart clearly indicates there’s a skew in the positive direction with the upside showing far more potential than the downside. This, in turn, has a positive outcome on the expected values for Bitcoin’s price this week. Last week the actual price of Bitcoin fell within the positive 0.5-1 standard deviation bands, so it’ll be interesting where this week’s time series will lie.

Here are the models’ estimates on daily returns for the week of October 14, 2019:

Day Expected Daily Return
Monday (10/14/19) 0.54%
Tuesday (10/15/19) 0.82%
Wednesday (10/16/19) -0.13%
Thursday (10/17/19) 0.64%
Friday (10/18/19) 0.19%
Saturday (10/19/19) 1.07%
Sunday (10/20/19) 0.41%

As we’ve already seen, the models are feeling pretty bullish on Bitcoin this week. Six out of the next seven days are expected to be positive return days with the only negative showing up Wednesday. We’ll see how this plays out in real life. If the model hits a 71.4% accuracy like last week when forecasting positive daily returns, then we can expect to be fooled once this week in thinking one of the days will be positive when in fact it’s a negative day.

Bullish or Bearish?

For the last months, Bitcoin’s experienced quite a drawdown from it’s yearly high in June. Historically speaking, a 45% drawdown isn’t uncommon for Bitcoin corrections, which sends us a hint that we’re near the bottom.

Having drawn together the information coming from the weekly and daily charts as well as the quantitative analysis produced from the models, it appears that this week is expected to bring positive gains to Bitcoin. If Bitcoin’s able to break through the technical resistance levels, I’m even more confident this week’s bullish models will be accurate.