Bitcoin’s Next Move: an Elliott Wave Theory

Photo by Chris Liverani on Unsplash

In all my conversations about cryptocurrency, few people ask me about the social, political, and economic impact of cryptographically-secure, time-stamped distributed ledgers.

(Which stinks, because I wrote a book, Consensusland, to explore that very topic.)

No, most people ask “should I buy bitcoin?” or “what altcoin will give me the best shot at making 100x profits?”

Those are easy questions to answer — “yes” and “nobody knows,” respectively.

A harder question to answer is “how long will this bull market last?”

As we all know, if you miss the peak, bitcoin’s price goes downhill a lot, pretty quickly. Do we top out at $20,000? Can we get to $100,000? What about $500,000 or $1 million?

Do we reach our peak at the end of 2021? Sooner? Later?

I don’t trade, but I understand market cycles and data science models. As an investor, it’s pretty important to have a clear view of the market and facts to back up your instincts, even if you can never know what’s around the corner.

People have created lots of models about bitcoin. I don’t know which ones to believe, so I try to learn about them all. When you’re making educated guesses about the future, it helps to have as much perspective as possible.

One model is Elliott Wave Theory, which fits cryptocurrency very nicely. In this theory, markets move up in five waves, then down in three waves.

On the way up, prices go like this:

  • Wave 1: Up.
  • Wave 2: Down, but not that much.
  • Wave 3: Up.
  • Wave 4: Down, but not as low as the previous wave.
  • Wave 5: Up.

During this uptrend, people are largely optimistic. Even during the second and fourth waves, core believers remain positive despite falling prices.

After that, you get three waves down:

  • Wave a: Steep, rapid decline.
  • Wave b: Bounce up.
  • Wave c: Long descent.

By the end of that last wave down, even the core believers sell out of the market or resign themselves to their losses. New buyers scoop up assets at basement prices. Then the cycle starts again.

For a more detailed explanation, read Wikipedia.

Based on this theory, could we have started wave 3 of a five-wave uptrend that sends bitcoin to an unthinkable price?

This analysis gets a little technical, so bear with me. Look at this chart of bitcoin’s price from pre-2011 until February 2020:

Trading chart showing two Elliott Wave cycles between pre-2011 to February 2020.

You see five waves up from 2009 to the end of 2013, then three waves down until mid-2015, then three waves up. It looks like we’re in the middle of the third wave, right?

What happens if we examine more closely?

When analyzing the chart, you can make the case for 2009–2013 as the first five-wave cycle and 2013–2015 as the corrective a-b-c waves.

  • Wave 1 — only OGs used bitcoin. Nobody else cared, and many laughed them off.
  • Wave 2 — first crash.
  • Wave 3 — OGs bounced back and new buyers/miners started getting into it. Bitcoin’s price went absolutely crazy. Mt. Gox made it easy for people to buy bitcoin while silk road offered the first real-world use case.
  • Wave 4 — second crash, silk road got busted.
  • Wave 5 — one last surge.

Then, we got the Mt. Gox disaster, the silk road leaders went to jail, and the U.S. government sold their bitcoin at bargain prices. Bitcoin’s price went down quickly, then up quickly, then down for a long time.

During that downtrend, almost everybody capitulated. People thought bitcoin was dead. Many gave up. Some threw away their hard drives and abandoned their wallets. Development almost stopped — in fact, some of the best developers started new blockchains.

By the end of 2015, bitcoin’s price bottomed and we started another cycle, with wave 1 completing in January 2018.

In 2019, we finished wave 2, when the price went down for a bit. Many people were still enthusiastic, development actually grew, and traditional financial firms geared up to enter the markets. People were cautiously optimistic (or at least open to the possibility that bitcoin could go up).

Now we are in the middle of a very long, strong, multiyear wave 3. Since the market is bigger, the waves are longer.

If that theory’s correct, there’s one detail that blows my mind.

Each time we reached a previous all-time high, we got there around the middle of a wave. If that pattern holds true on this fourth go-round, it suggests we could have two more years of a bull market after we hit $20,000.

Can you imagine how high the price could go?

For sake of comparison, the dot-com bubble peaked at $6.7 trillion, equal to almost $10 trillion in today’s dollars.

If we get even close to those numbers, the cryptocurrency market will go up 33,000% by the end of 2021. Bitcoin’s price will go higher than $300,000, assuming it keeps its +60% market share.

Insane numbers and probably not realistic. But didn’t everybody say that about $10,000, and $1,000 before that, and $100 before that?

Yes, this data is circumstantial. Nobody can predict the future. As somebody at my bitcoin meetup said, “chart analysis is like driving by looking in the rearview mirror.”

All true.

That said, keep in mind: past is prologue. As long as these patterns continue, you should expect the theory to hold up. After all, this model illustrates human behavior and market psychology. Those things rarely change.

But facts do. Based on the facts that I see, the trend is heading in the right direction and there is nothing to suggest it will shift.

That could be way off, but sometimes it’s not the worst thing to be optimistic.

Relax and enjoy the ride.


What do you think?


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